Aiming for a five-figure passive income is no easy task. But for individuals willing to take on some extra risk in the stock market, hitting this goal isn’t unrealistic in the long run. And for those fortunate enough to have a nice lump sum of savings, kick-starting a winning portfolio is now easier than ever.
With that in mind, let’s explore how I would aim to transform £30k of savings into a £32k passive income within the next 30 years.
Capitalising on volatility within an ISA
One of the most powerful tools within an investor’s arsenal is the Stocks and Shares ISA. While there are some limitations, this investment account completely wipes out capital gains and dividend taxes from the equation. That means my future passive income can come directly into my pocket without HMRC getting its grubby fingers on it.
The biggest caveat here is obviously that only £20k can currently be injected into an ISA each tax year. So, to invest £30k of savings, I’d have to do it over a period of two years.
The big question now is where to invest the first lump sum. With the stock market being fairly volatile of late, it can be a nerve-racking experience, especially for first timers. However, while volatility can be unpleasant to endure, it also creates lucrative long-term buying opportunities.
In fact, investing capital just after a major crash or correction has historically led to some of the biggest returns. And I see no reason why this pattern won’t once again repeat itself in 2024. Typically, the UK stock market rises between 8% and 10%, depending on the index. But by intelligently capitalising on volatility, a portfolio could be positioned to achieve better results.
Even if it’s bumped to just 11%, that’s more than enough to transform a £30k lump sum into £800k ISA over the next three decades. And following the 4% withdrawal rule, that translates into a tax-free passive income of £32k.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Best stocks to buy now?
While an 11% return sounds easy on paper, in practice, it can be a bit more challenging. Don’t forget stock prices don’t always go up. And building a portfolio of poorly selected enterprises could end up destroying wealth rather than creating it.
So, which shares should investors buy now? Gamma Communications (LSE:GAMA) has piqued my interest. The communications-as-a-service specialist helps companies improve collaboration and interaction with customers. And it’s been more-than-chugging along nicely, with the share price growing 560% over the last 10 years – or 21% per year.
Recently growth has slowed in light of the current economic environment. But regardless of how long it takes for the British economy to bounce back, a huge growth opportunity is emerging in 2025.
Next year, BT Group will be turning off its Public Switched Telephone Network (PSTN). That means the old-school copper landlines will be removed, and communications will now flow through internet lines. However, there are currently an estimated three million small businesses relying on PSTN. And Gamma intends to snap up as many of these when they’re forced to make the switch.
That’s obviously easier said than done, and BT will undoubtedly be fiercely attempting to retain these customers. Therefore, capitalising on this opportunity may not be that easy. And without this surge in new customers, growth continues to slump making it harder for the stock to deliver double-digit returns over the next 30 years. Nevertheless, it’s an opportunity worth further investigation, in my opinion.
