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It is important to me to have cash saved in some savings accounts. But to achieve my financial goals, I feel I need to invest the majority of my capital in UK shares, and with a tilt towards FTSE 100 stocks.
I like to keep some of my wealth in a cash ISA and a few other accounts. Part of this is in case I need money for an emergency or because I need a place to stash cash before a big purchase.
It's also because holding cash fits my desired risk and reward profile. The returns I can expect to get from a savings account are lower than those from stocks. But I know that the money saved in my Cash ISA will still be there in five, 10 or 30 years.
Here is my plan
The same can't be said for my stocks and Shares ISA. Stock markets go up and down, and I know I can lose money investing in a company if experience serious business problems or go bankrupt completely.
But as I mention, most of my money is invested in UK and US stocks. I have achieved this by investing directly in stocks and allocating capital through some managed funds and exchange-traded funds (ETFs).
This is because I don't think I can earn a healthy passive income in retirement with just a savings account. I need to get a higher return by taking more risk with my money.
Past performance is no guarantee that my decision is the right one. But the strong returns of the FTSE 100 over many decades suggest my strategy will pay off.
A passive income of £2,219
Let's say I invested £20,000 in a FTSE 100 fund and added an extra £300 a month to grow my holdings.
After 30 years, based on the Footsie's long-term average annual return of 8%, you could expect to have earned a cool £665,822. This would then give me a monthly income of £2,219, based on withdrawing 4% of this amount per year.
Let's say I put the same amount into a cash ISA yielding 4%. We'll also assume that interest rates remain the same over that 30-year period (an unlikely situation, in my opinion).
In the end, I will have earned a disappointing £274,485 over those three decades. This, in turn, would provide a monthly passive income of just £915.
A FTSE 100 stock to consider
So what kind of stocks would you buy to achieve this goal? A good idea might be to buy FTSE 100 value shares like Coca-Cola HBC (LSE:CCH).
The soft drink bottler trades on a forward price-to-earnings (PEG) ratio of 0.6. Any reading below one indicates that a stock is undervalued.
The theory is that value stocks could provide especially high returns as the market corrects prices over time. In the case of Coca-Cola HBC, I expect growing sales of its popular beverages in emerging markets to help its share price rise over time.
I also like this Footsie stock because products like Coke, Elfand fantasy They continue to be well purchased at all points in the economic cycle. This, in turn, should help my portfolio remain stable even during economic downturns.
