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

Closeup of "interest rates" text in a newspaper
Investing Articles

Here’s why 2025 could give investors a second chance at a once-in-a-decade passive income opportunity

Could inflation hold up interest rates in 2025 and give income investors a second opportunity to buy Unilever shares with…

Read more »

Investing Articles

As analysts cut price targets for Lloyds shares, should I be greedy when others are fearful?

As Citigroup and Goldman Sachs cut their price targets for Lloyds shares, Stephen Wright thinks the bank’s biggest long-term advantage…

Read more »

Investing Articles

Is passive income possible from just £5 a day? Here’s one way to try

We don't need to be rich to invest for passive income. Using the miracle of compounding, we can aim to…

Read more »

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »