Investing £200 per month in UK shares to make a £12,000 passive income may sound like an impossible task after the 2020 stock market crash. After all, the FTSE 100 has declined by around 25% since the start of the year and has recently shown little sign of mounting a sustained recovery.
However, through buying high-quality companies at low prices, diversifying across a wide range of businesses and holding for the long run, an investor could generate impressive returns. Over time, they could amount to a generous income level for the long run.
Buying high-quality UK shares for the long term
The stock market’s track record of recovery suggests that many UK shares are likely to deliver improving performances over the long run. However, the strongest performers may prove to be those businesses that offer the best value for money today.
For example, some stocks have solid financial positions and wide economic moats. Therefore, they are relatively likely to survive the short-term economic challenges that may be ahead, as well as deliver improving financial performances over the long run. They may be able to use their solid balance sheets to make acquisitions while rival companies are cheap. Or, they could benefit from worsening performances among sector peers that increase their market share in the coming months.
Buying such companies while they trade at low prices may allow an investor to obtain the best value UK shares. In other words, the best means of generating a high long-term return may occur where high-quality businesses are trading at low prices. This could lead to strong earnings growth, as well as the potential for a large upward re-rating in a stock’s valuation as investor sentiment gradually improves.
Building a portfolio after the stock market crash
As well as buying the best UK shares at the lowest prices, diversifying across multiple sectors may improve an investor’s long-term passive income prospects. This may reduce risk, but also allow an investor to access growth opportunities that are available in a wide range of industries. Since it is currently difficult to ascertain which sectors will deliver strong performances, spreading the risk across multiple areas could lead to a larger portfolio in the long run.
Even if an investor simply obtains the same rate of return as the wider index, a regular monthly investment could produce a worthwhile nest egg in the long run. In fact, the FTSE 100 has produced an annualised total return of 8% since its inception in 1984. Investing £200 per month at an annual 8% return for 30 years could produce a portfolio valued at £300,000. Withdrawing 4% per annum would lead to a passive income of £12,000 per year, which could grow at an above-inflation pace as the world economy recovers from its decline in 2020.
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.