Nothing beats the feeling of earning money while I sleep, waking up with the knowledge that I’m financially secure even if my business hits hard times. Passive income is the perfect way to achieve this, using my existing savings to earn interest through smart investments.
To get the full benefit from my investments while reducing my exposure to risk, I’ve developed a diversified investment strategy that combines low-risk, low-yield options with more lucrative, risk-on selections. As with any investment strategy, each person should consider their individual circumstances and do sufficient research to formulate a plan that best suits their needs.
1. Government liquidity fund
Government liquidity funds are one of the easiest ways for first-time investors to potentially capitalise on their savings. Often bundled in as an investment option with a standard bank account, they provide a simple one-click journey to start earning interest through government-issued bonds, notes and bills.
With default protection up to £85,000, they are low-risk but accrue very little interest — sometimes even less than inflation — but more than a standard savings account. I aim to put a significant portion of my portfolio into this type of fund to stay ahead of inflation with minimal risk.
2. Stocks and Shares ISA
Unlike a government liquidity fund or cash ISA, a Stocks and Shares ISA helps reduce my exposure to inflation or devaluation of the pound. You can manage your own portfolio, but I’ve chosen a managed S&S ISA that tracks a range of well-performing stocks with strong growth potential. Currently, UK citizens can invest up to £20,000 each tax year tax-free into an ISA.
I get a better chance of earning inflation-beating interest with a Stocks and Shares ISA, but also more chance of losing money if the stock market underperforms. It’s slightly riskier than a government fund but with more chance of a higher return. I aim to dedicate around one-third of my portfolio to a Stocks and Shares ISA.
3. Individual assets
To round off my strategy, I’m looking at a few growth assets and stable investments that I think will perform well over the next few years. These may include safe-haven commodities like gold and silver or shares in companies with high revenue and strong future prospects. As someone who works in technology, I’m looking at tech stocks like BAE Systems and Flutter because this is my area of expertise. Choosing stocks from an industry you have experience in will help you make better-informed selections.
Investing in individual assets give me a chance to make decent long-term returns but are riskier than funds or ISAs and incur additional brokerage fees. Such investments require some knowledge of the stock market, as market volatility presents a greater risk to individual assets.
