Considering the ongoing stock market correction, investing in shares to build a passive income may seem like a crazy idea today. After all, the market capitalisations of many once-loved enterprises have been pummelled into the ground over the past year.
However, given time, plenty of these companies have the potential to bounce back and return to their former glories. Some may even soar higher than before, producing impressive capital gains to build a sizable nest egg for patient investors. So much so that withdrawing just a small piece each year could be enough to generate an impressive retirement income.
Capitalising on cheap stocks
Arguably one of the most lucrative and sustainable investing strategies around is to buy shares when they’re undervalued. Even non-investors know about the “buy low, sell high” rule. But that’s far easier said than done.
Determining whether a stock is undervalued isn’t exactly a simple process. In fact, corporate valuation is so tricky that even professionals trip up on it constantly. Fortunately, in 2022, finding cheap stocks has become far easier. After all, with everything seemingly in freefall, there are buying opportunities all around.
Does that mean investors should just buy every beaten-down income stock to build a passive income? Certainly not.
The macroeconomic environment created by rising inflation and interest rates places a lot of hurdles for businesses to overcome. And the additional uncertainty of activities in Eastern Europe, as well as global supply chain disruptions, doesn’t exactly help the situation.
But in the long run, these are ultimately short-term problems. And it’s likely that the firms with sufficient financial flexibility will weather this storm before eventually recovering.
What’s more, if these companies also have prudent leadership, they may be able to capitalise on the competitive opportunities created. And by investing in these businesses, an investor’s portfolio could grow substantially.
Building a £29,800 passive income
Being a successful stock picker takes a lot of practice and emotional discipline that, sadly, not everyone possesses. Fortunately, even those who don’t have the time to research which shares to buy can still capitalise on the opportunities created in this stock market correction.
How? By simply buying an index fund.
The FTSE 100 has historically yielded an average annual return of around 8%. Investing £500 a month into a low-cost index tracker to replicate this performance over 30 years would lead to a portfolio worth just over £745,000. And following the classic 4% withdrawal rule, investors could enjoy a steady passive income stream of £29,800 each year.
Of course, in practice, things are never this simple. Just because the FTSE 100 has delivered 8% historically doesn’t mean it will continue to do so moving forward. And the average return could be considerably lower over the next three decades.
Furthermore, as 2022 has abruptly reminded everyone, the stock market can be quite a volatile place. And it’s almost guaranteed that another crash or correction will happen again during this time period. Maybe even more than once.
Depending on these unknown factors, it’s possible to have a nest egg worth considerably less than expected. However, given the potential rewards, investing in shares to build a long-term passive income is worth the risks, in my opinion.
