£20,000 in savings? Here’s how I’d aim to turn that into a £60,499 passive income

Investing in a broad portfolio of quality stocks can be a great way to build long-term passive income. This is what I’m doing to reach that goal.

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I love the idea of making money without having to lift a finger. But then who doesn’t? There are many ways that one can generate a passive income, but my personal favourite is to invest in UK blue-chip shares.

£20k is a decent stash of money to get started with. It’s a sum many will be looking to deploy in this tax year in a Stocks and Shares ISA.

Here’s what I’d do if I had this sort of sum to invest.

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.

Diversification

My priority would be to build a diversified portfolio of growth and dividend stocks. This way I could target an attractive blend of capital gains (as share prices rise) along with dividend income.

In terms of diversification, I’d look to spread my investment across a wide range of sectors and geographies. This way I can reduce risk and capitalise on growth opportunities as they arise.

I’d also aim to fill my portfolio with different types of financial instrument. As an illustration, I’ve recently bought shares in Ashtead Group and Legal & General; invested in the HSBC S&P 500 UCITS ETF exchange-traded fund; and opened a position in the VT AJ Bell Balanced managed fund.

A top AI stock

So, what sort of investment would I start off with in this new tax year? One top FTSE 100 share I’m considering for my ISA is Microsoft (LSE:MSFT).

I already have exposure to the company through that S&P 500 tracker fund I mentioned. Around 7.2% of the fund is weighted towards the US software giant.

But I’m also thinking about buying Microsoft shares to increase my exposure to the artificial intelligence (AI) boom. As with Nvidia, sales are taking off as individuals and businesses seek to harness the power of machine learning.

Hargreaves Lansdown analysts have commented that Microsoft “is top of the pack when it comes to the potential monetisation of AI“. This was evident in the firm’s latest financials which showed revenues up 18% in the December quarter, to $62bn.

On the downside, Microsoft’s costs are tipped to balloon as it invests heavily in AI. But this is a risk I’d be happy to take given the pace at which the market is growing.

The road to a million

By adding a blend of different investments like this, I could expect to increase my wealth by an annual average of 9% over the long term. While not guaranteed, this is the average that UK shares have been providing for decades.

In this example, that £20,000 investment compounded over 30 years would (excluding any fees or taxes) turn into £294,612.

That’s a great return, I’m sure you’d agree. However, if I was able to invest a little extra each month I could really supercharge my wealth.

With a £500 monthly investment, I would have £1,209,983 sitting in my account, giving me a seat on millionaire’s row. That’s based on that same 9% return over 30 years.

From this super sum, I could then rotate my portfolio into dividend stocks with an average yield of 5%. This could give me a potential second income of £60,499.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Ashtead Group Plc and Legal & General Group Plc. The Motley Fool UK has recommended Microsoft and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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