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There are several ways the modern investor can try to earn life-changing passive income. But I think the best way to do this might be to create a portfolio of UK shares.
Investing in stocks does not require large sums of cash up front to get things going. And few other asset classes have provided as amazing long-term returns as stocks.
If you invested £7,000 in UK shares today, you would have a good chance of eventually turning it into a monthly passive income of £1,160. This is how I would try to do this.
Avoid the tax collector
The first thing I need to do is think of ways to maximize my returns.
Choosing a broker with low trading fees and management charges is one way. But selecting a financial product that eliminates any tax payments is the biggest game-changer for long-term wealth creation.
The stocks and Shares ISA and Self-Invested Personal Pension (SIPP) are great (and incredibly popular) ways to do this. The ISA allows me to invest £20,000 each tax year without having to pay a single penny in capital gains tax or dividends.
Meanwhile, the SIPP typically allows a person to invest up to £60,000 a year, depending on their income.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Target the FTSE 100 and FTSE 250
The next thing I would do is focus on buying FTSE 100 and FTSE 250 Share.
I buy shares from all over the London stock market. But the vast majority of my cash is used to buy shares in the UK's major indices.
actions of the Alternative investment market can provide amazing returns. But generally speaking, FTSE 100 and FTSE 250 stocks tend to be more stable, from an investment perspective. This makes the investment process much less stressful and provides me with a reliable return over time.
On average, British investors earn an annual return of 7.5% on Footsie shares. The FTSE 250 offers an even higher return of 11%.
In my opinion, those are pretty excellent numbers. And, if this trend continues, a lump sum of £7,000 invested equally across all these indices would become £279,142 over 40 years. That's the equivalent of a monthly income of £1,163, if I withdraw 5% each year.
<h2 class="wp-block-heading" id="h-funds-vs-stocks“>Funds versus stocks
One way to target these returns could be by purchasing an index tracking fund. Doing so could allow me to hit these numbers instantly without having to do a lot of homework.
But I'm not afraid to do something hard. And by researching individual stocks to buy, I have the chance to get an even better return than a FTSE 100 or FTSE 250 fund could provide.
TBC Banking Group (LSE:TBCG) is one of the top stocks that I think could deliver amazing returns. And today it is for sale: the company trades with a forward price-to-earnings (P/E) ratio of 5.3 times. It also carries a huge dividend yield of 6.7%.
TBC is the largest bank in Georgia, an emerging market that is expected to continue expanding rapidly. This provides financial services companies like this one, whose profits have soared 121% over the past five years, more considerable growth opportunities.
While vulnerable to economic downturns, I think this FTSE 250 stock could deliver surprising long-term returns. A portfolio full of stocks like this could, over time, provide exceptional passive income.
