£1,000 a month in passive income might be stretching ambition. But £12k a year, without having to work for it, is well worth having. So how am I going about targeting my retirement income plans?
There’s one approach I wish I’d tried many years ago. Had I gone for it, it would have easily beaten my actual investment returns over the past few decades.
I’m thinking of Berkshire Hathaway, run by ace investor Warren Buffett. Since he took control in 1965, Berkshire has produced an average annual return of 20%.
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Beating the index
That’s a phenomenal result, soundly beating the 10.5% the S&P 500 averaged over the same period. But what kind of wealth could it have generated?
If I’d started investing 20 years ago with just £100 per month, that kind of return would have left me with almost a quarter of a million pounds today. If I retired and put that into a relatively safe investment trust paying 5% dividends, my £1,000 per month would be sewn up.
It’s worth stressing that a past performance like that is definitely no guarantee of any future repetition. For one thing, it was helped by few people knowing who Buffett was in the early years. A lot of future hope will already be built into the Berkshire share price today.
ISA millionaires
What about a more UK-focused angle? AJ Bell, Interactive Investor, and Hargreaves Lansdown are the three biggest investment services providers in the UK. Between them, they reckon the number of ISA millionaires in the UK has risen by more than 800 in the past 12 months.
An investor with more than a million in their Stocks and Shares ISA can be enjoying a lot more than £1,000 per month in passive income. What are their secrets?
There’s nothing mysterious. Success for most of them has come from using as much of the annual ISA allowance as possible, and investing it in a portfolio with a decent amount of diversification. And then just giving it time.
Get rich… slowly
So often when I speak to newcomers to stock market investing, they seem to be looking for ways to get rich quickly. But for these successful millionaires, it’s all been about getting rich slowly.
What do ISA millionaires actually buy in their portfolios? It’s mostly individual equities and investment trusts. Non-millionaires put a significant amount of cash into managed funds, which the millionaires avoid. There’s a lesson there, for sure.
So what’s the bottom line for me? I’m not going to try to suggest the best stock picks for long-term passive income. I’d get some right, I’d get some wrong. And the best to hold will surely change over the years anyway.
All in the approach
In fact, one of the hardest things is knowing what to sell rather than what to buy. And getting that right is a key skill of the best investors.
No, for me, it’s all about the approach. Whether we follow Buffett or UK ISA millionaires, there’s a consistent theme. Invest as much and as often as possible. Diversify across really great companies, buying when prices are fair. And then give it time.
