It’s not necessary to be an investment expert to build a high and rising lifetime passive income from stocks and shares. It takes a bit of effort, but the rewards make it worthwhile. If I had £10,000 of savings I didn’t need to touch for years, I’d put them to work.
I don’t think leaving long-term savings in the bank is good enough. While everybody needs a bit of ready cash on instant access for emergencies, the returns aren’t good enough and will only get worse when the Bank of England starts cutting interest rates.
Generating a passive income through shares is riskier, of course, as equities rise and fall all the time. Returns can vary massively from year to year. It takes a bit of time to get used to the ups and downs.
Volatility is your friend
Investing in whizzy small-cap growth stocks that promise to shoot for the stars is particularly risky. While some may fly, others could crash and burn.
I prefer to follow investors like billionaire Warren Buffett, who aim to get rich slowly and steadily, building their wealth over years and decades. FTSE 100 stocks are a great way of achieving this. While blue-chips can also be volatile, targeting solid, established names with loyal customers and steadily rising revenues and dividends limits the risk.
I can further reduce the danger by investing in a spread of around 15 different stocks operating across different sectors, and feeding money into the market little by little, taking advantage of any stock market dip to buy shares on the cheap.
Over the past 20 years, the FTSE 100 has delivered an average return of 6.9% a year, with all dividends reinvested. I hope to beat that by picking individual stocks.
But let’s say I end up being a dead average investor. Most of us are, if we’re honest.
If I invested a single lump sum of £10,000 at age 30 and left it invested until I turned 68, I’d have £126,227. If I drew 5% of my pot each year, that would give me £6,311 a year of passive income in retirement.
These things take time
That’s not bad from an initial investment of just £10k. However, investing isn’t a case of just once-and-done. It takes years.
If I could invest £10,000 a year for each of those 38 years, I’d have a staggering £1,926,906 by the time I retired. Again, this assumes average growth of 6.9% a year. Drawing 5% of that annually would give me a staggering second income of £96,345.
It’s important to stress that there are no guarantees when investing. I could generate a lower return than 6.9% a year. On the other hand, I could get a better one. I’m certainly hoping to do that.
And while £96,000 a year sounds terrific, in 38 years it’ll be less in real terms. Plus there’s also the danger I will dip into my pot to cover short-term spending, depleting my retirement wealth.
What these figures show is that it’s possible to build sizeable passive income from small, regular sums. The key is to start as early as possible and stick with it. Being an investment genius doesn’t come into it.
