How £50 a week could become a passive income worth £45,209

Millions of us put money aside for a passive income, but stocks and shares allow us to be much more ambitious. Dr James Fox explores.

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Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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Unless we have a ton of cash, it can be very challenging — if not impossible — to earn a substantial passive income. However, getting to the position whereby we can earn one is made easier if we adopt a sensible and data-driven approach to investing.

Building wealth

If we don’t have a large amount of starting capital, we need to build wealth. And this can take time. So how can we do it? Well, there are several key ingredients.

Firstly, we’re going to need to commit to contributing a proportion of our earnings to an investment account. This is how we fuel the fire. Continuous investment also allows us to smooth out the peaks and troughs of the market. Even £50 a week can really add up over time.

Next, we need to truly understand the importance of reinvesting our earnings. Rather than taking our gains one year to, say, pay for a holiday, I need to keep reinvesting. This allows us to benefit from something called compound returns.

Investing sensibly

Of course, we need to apply ourselves to invest successfully. If we make poor investment decisions, or simply invest in companies we like, we could lose money. That’s why it pays us to make informed investment decisions.

If we’re cautious, we can invest in funds, trusts, or ETFs. Scottish Mortgage is a favourite of mine, delivering annualised returns around 30% over the last decade — the first part of the decade seeing much more growth than the second.

Or we can pick stocks ourselves — the vast majority of my investments are stocks.

The goal, in my case at least, is beating the market. I look for double-digit annualised returns over the long run.

Let’s say I average 10% annualised growth — that’s total returns (dividends and share price growth) — and I’m contributing £50 a week to my portfolio.

It requires patience but, after 30 years, I’d have £452,097. From that point on, the portfolio would be generating £45,209 annually, on average.

One stock for growth

AppLovin (NASDAQ:APP) is one stock that has helped my portfolio beat the market. The stock’s up 356% over 12 months, and despite these huge gains, I’d buy more if it wasn’t already a large part of my portfolio.

Admittedly, AppLovin’s growth trajectory has been fairly unsteady, and that’s a risk. However, things appear to be changing, driven by the company’s release of AXON 2.0 — its artificial intelligence (AI) powered technology.

The US-listed company uses its proprietary technology to help app and platform operators maximise their advertising revenues. AXON 2.0 uses AI to recommend new apps and platforms to users based on their established preferences.

Despite the aforementioned rally, AppLovin still looks undervalued. It’s trading at 16.2 times forward earnings and it has a price-to-earnings-to-growth (PEG) ratio of 0.81. For me, the PEG ratio is a real head-turner.

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.

James Fox has positions in AppLovin Corporation and Scottish Mortgage Investment Trust Plc. The Motley Fool UK has no position in any of the shares mentioned. 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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