All investors wish to secure passive income for their future needs, but many feel they don’t have enough funds to assign for investment to generate significant returns.
I’m here to show investors they don’t need to break the bank to secure a passive income stream in later life. All that’s required is a regular cash commitment and a diversified investment approach.
My £150 a month plan is manageable, yet it equates to a tidy £1,800 a year. Over a decade, this is £21,600. While all investments fluctuate over long periods, it’s not unreasonable to believe that my cash investment will have increased exponentially.
So, how am I building my portfolio to ensure it is diversified and will generate significant long-term returns? I’ll be dividing my funds into the following investment inputs.
ETFs
Exchange traded funds (ETFs) are a collection of shares that trade on an exchange at any given time. Either actively managed or set up to track a broader index, they provide a low-cost way of gaining exposure to a diversified basket of options.
A good example is the popular Stocks and Shares ISA. Data for the 2020/21 tax year showed that the average Stocks and Shares ISA returned 13.55%.
I personally like the Hargreaves Lansdown Stocks and Shares ISA, as it offers a low account management fee of 0.45% and a simple user interface.
Mutual funds
Similar to ETFs, a mutual fund is a compilation of assets operated by a professional money manager. The difference is that mutual funds trade only once a day after the market closes.
Via a mutual fund, investors gain access to a professionally managed portfolio of diversified options, including stocks, bonds and other securities.
Each shareholder in the fund participates proportionally in the gains or losses in any given period. High-performing, large-stock mutual funds have produced returns of up to 12.86% in the last 20 years.
Vanguard is the largest issuer of mutual funds in the world, and this is where I’m allocating some of my £150. The firm offers a range of options such as index funds, Vanguard ESG funds and target retirement funds.
Single line stocks
I also like to invest in individual stocks, chiefly because public companies regularly deliver cash-generating dividends to shareholders.
The highest dividend-yielding company on the FTSE 100 is homebuilder Persimmon at 15%, but the average is around 4%.
When it comes to picking individual stocks, I consider whether the company – and the industry it operates in – is future proof. That means I can reasonably say it will continue to generate revenue in an evolving world.
In that case, National Grid is a good consideration for my portfolio, as we are going to need electricity whatever the future looks like, and it boasts a 4.82% annual dividend yield.
It’s important to note that any of the above could generate losses for me at any given moment, but by creating a regular and diversified investment plan, the potential to generate long-term passive income is greater.