Building a portfolio capable of generating significant amounts of passive income is an investment goal for many of us. And by investing sensibly, it’s possible to leverage the stock market to generate significant returns and eventually generate a life-changing passive income.
Let’s explore how to turn £100 a week into a passive income stream worth tens of thousands a year.
Taking a lesson from Sam Allardyce
It might not be the obvious analogy, but going long — à la Sam Allardyce’s Bolton team — has historically yielded strong returns.
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Over the past 20 years, and this has been a tough 20 years for the UK economy, the FTSE 100 has delivered average annualised returns of 7%.
For those of us new to investing, 7% probably sounds great. It’s far more than can be achieved from any savings account in the UK.
This, therefore, could have been achieved by simply investing in an index tracker for the past two decades.
Meanwhile, the S&P 500 has delivered average annualised returns of 12.3% — taking into account the depreciation of the pound versus the dollar. In short, a decision to have invested £50 a week in a FTSE 100 tracker, and £50 a week in an S&P 500 tracker 20 years ago, would have yielded significant returns.
Today, that £100 a week would be worth £294,552 based on the aforementioned annualised returns. If I could generate a dividend yield on this — which is certainly possible today — I’d be earning £17,673 in passive income.
What’s more, if I’d have done this using a Stocks and Shares ISA — which is free to any UK resident and super-easy to set up — it’d all be tax free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Things don’t always go to plan
Let’s start with a caveats. Blue-chip indexes historically have moved in the right direction, but this isn’t always the case.
The Nikkei 225 — the Japanese stock market — has recently hit new highs, but for years the index has floundered. For context, in 1989 the Nikkei 225 hovered just under 40,000. A decade ago, it was around 10,000.
Personally, most of my investment aren’t in index trackers. I tend to prefer investing in stocks and, to a lesser extent funds, as I have the time to conduct my own research.
However, investing in stocks can leave us exposed to more risk. For example, I had previously invested in Persimmon (LSE:PSN) partly on the basis that it was the least exposed to the country’s cladding crisis.
However, that proved to be incorrect, and Persimmon quadrupled its budget to reclad thousands of homes in 2022. In turn, the share price fell even further.
Persimmon stock lost around 66% of its value between 2021 and 2023, mainly caused my changes to the economic outlook, but exacerbated by the cladding crisis.
While Persimmon might be a interesting investment today, it’s worth remembering that if my investments fall by 50%, I’ve got to go 100% to get back to where I was.
As billionaire investor Warren Buffett says, Rule One is “don’t lose money“. This is where trackers and funds can be useful, especially for those of us that don’t have time to thoroughly research our investments.
