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.
The post How I’d invest £250 a month to earn a passive income for life appeared first on The Motley Fool UK.
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.
Motley Fool UK 2021