Currently, I have around £20k in cash sitting in my investment accounts. Now, I could use these savings to build a passive income stream. Alternatively, I could invest the money for growth. So what’s the best option for me? Let’s discuss.
Is passive income right for me?
I can certainly see the appeal of creating a passive income stream. The beauty of this form of income is that no work is required to generate it. That’s why it’s often called the ‘holy grail’ of personal finance.
The thing is though, given my age (early 40s), I’m not sure that going for passive income is the best approach for me right now.
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Let’s say I could obtain a yield of 5% on my savings (that’s about the highest yield I could hope for without taking on too much risk and potentially blowing up my savings).
That equates to income of £1,000 a year. That would be handy, but it’s not going to change my life. I’d still have to work for the next 15-20 years.
I could reinvest the income, of course. But at 5% a year, it’s not going to grow into an enormous sum. I calculate that after 20 years, the money would be worth around £53,000.
A growth strategy could deliver better results
Given my age, I reckon investing for growth is the better option for me.
Let’s say that by pursuing a growth strategy, I was able to obtain a return of 10% per year on my savings. At that rate of return, after 20 years, my money would be worth around £135,000.
Now, that sounds much more interesting to me. That kind of money would give me plenty of options.
If I was able to pick up a 5% yield on that sum, it would equate to passive income of £6,750 a year.
In other words, because I had originally invested for growth and grown my savings at a high rate, I’d now be able to generate a lot more income.
Generating high returns
As for how I could obtain a return of 10% a year, I think it could be achievable with a well-diversified portfolio of high-quality growth stocks.
I’m talking about stocks such as Apple, Microsoft, Alphabet, and Amazon – all of which are driving the digital revolution we’re living through and generating strong returns for investors in the process.
Of course, if I was to pick the right stocks, I might even be able to generate even higher returns.
For example, if I was to get onto a stock like chip designer Nvidia early on, I could see my returns explode. Over the last five years, it has risen more than 500%.
Now, it’s worth noting that investing for growth is generally riskier than investing for income.
Growth stocks tend to be volatile. So I’d expect the value of my portfolio to fluctuate in the short term and I could even lose money long term.
However, with a 15-20-year investment horizon, I have time to ride out stock market volatility.
So investing for growth is a bit of a no-brainer to me.
