How I’d invest £250 a month to earn a passive income for life

Investing modest amounts of money in high-quality shares on a regular basis could lead to a growing passive income over the long run, in my view.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Making an attractive passive income over the long run does not necessarily require large sums of capital. Nor does it need an investor to constantly buy and sell stocks depending on which sectors are outperforming the wider stock market.

Rather, a simple buy-and-hold strategy that focuses on purchasing high-quality companies at low prices can produce a large portfolio. From this, a generous income can be drawn that provides financial freedom in the long run.

A buy-and-hold strategy to make a passive income

It is tempting to buy and sell stocks over a short period when aiming to make a good passive income over the long run. After all, events such as the recent stock market rally can lead to sizeable profits for investors. This may lead them to lock-in profits and seek to repeat their success elsewhere.

However, a buy-and-hold strategy may be more effective in building a portfolio long term. It means lower commission costs and potentially less effort than a plan to trade stocks regularly. And it also allows holdings within a portfolio to deliver on their potential. This is especially relevant at the present time. After all, a number of solid businesses may take many months, or even years, to recover from their present-day challenges.

Furthermore, a buy-and-hold strategy can lead to a larger passive income in the long run. It allows compounding to have a positive effect on a portfolio’s value. Over time, this can turn even modest monthly investments into sizeable sums of capital.

Buying high-quality stocks at cheap prices

As well as using a buy-and-hold strategy, buying high-quality companies at low prices can have a positive impact on an investor’s passive income prospects. The past performance of the stock market has shown that recoveries from its declines have always taken place. Therefore, using market cycles to buy undervalued shares can be a means of outperforming the wider index.

Certainly, some stocks are priced at low levels because they have weak finances, lack a competitive advantage or face major challenges that may derail them. However, other stocks currently have low valuations based on weak near-term operating outlooks. These are likely to reverse as the world economy’s prospects improve.

Investing money to make an income return

Even if an investor merely matches the high-single-digit annual returns of the stock market, they could make an attractive passive income in retirement with a modest monthly investment. For example, investing £250 per month at an annual return of 8% would produce a portfolio valued at £375,000 within 30 years. From this, a 4% annual withdrawal equates to an income of £15,000.

By purchasing strong businesses at low prices and holding them for the long run, it is possible to beat the stock market’s returns. This may lead to an even more appealing income in the coming years.

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.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »