Having my money work for me rather than me work for my money sounds great in theory, but is it realistically achievable? I think it is, but it’s going to take patience, as well as consistency, to keep drip-feeding my money regularly into the stock market. So, let’s look at my approach to investing £50 every week, which over time could reach £15,500 a year in passive income.
The maths
Firstly, the maths, to prove it’s possible. If I start with an initial sum of £10,000, and invest £50 a week into stocks for the next 30 years, gaining an average annual return of 10.5%, I would end up with £775,000. This is due to the power of compound interest, which is the snowball process of earning interest upon interest.
If I were then earning a 2% dividend yield on this £775,000, that would be my £15,500 in passive income.
But where does this figure of 10.5% annual return come from? Well, from an S&P 500 exchange-traded fund, which is an index fund that tracks the performance of the 500 largest public companies in the USA.
Passive index investing
Over nearly 100 years (1926-2021), the average annual return of the S&P 500 — with dividends reinvested — has been around 10.5%.
The diversity in the index means I don’t have to think about what is trending in the market from one year to the next. I just passively benefit over time from the collective strength of all 500 companies!
For example, if a growth stock like Tesla is going up, then that’s good for me because it’s part of the index. If the market rotates to more mature companies like Exxon Mobil or McDonald’s, then again I don’t have to worry because they’re also included in the S&P 500.
Of course, I don’t know what stock markets will look like in 30 years, but I have nearly 100 years of data on my side, demonstrating the consistency of that average 10.5% annual return. So half my £50 a week goes into an S&P 500 index fund, whether it’s up, down or sideways.
Active stock picking
The other half of my money goes on picking individual shares myself. Two stocks I’ve been buying lately are Moderna and Ginkgo Bioworks.
Both companies were founded upon the idea that biology is programmable, like software. In fact, Moderna designed its coronavirus vaccine remotely in just two days after the genome of the virus was published online.
Meanwhile, Ginkgo Bioworks has built a cell-programming platform utilised by customers from the worlds of health, agriculture, food, energy, and even cannabis. If Ginkgo Bioworks succeeds, with the shares currently under $3, this could turbocharge my portfolio returns and get me to my target sooner.
Of course, both stocks could ultimately perform poorly. That’s why I only put half my money in such investments.
Upon reaching my target, I could swap into an index fund that pays me the dividends as income. The average yield of the companies in the S&P 500 is 2%, which would pay me my annual £15,500 in passive income.
This post was originally published on Motley Fool
