Whenever I have extra money, I invest in companies within my stocks and Shares ISA. Over time, I would like to live off the passive income generated by this portfolio.
However, this is not a get-rich-quick scheme. I'll have to be patient.
But the good news is that small amounts can add up to a surprisingly large amount, if given enough time.
Passive investment
One of the easiest ways to build an investment portfolio is through low-cost exchange-traded funds (ETFs). These allow you to invest in multiple stocks, bonds, property and more, all at once.
Many UK investors are attracted by the FTSE 100 Indexknown for its stability and generous dividends. The long-term annual average is around 8%.
However, it is a fact that many of the companies that are changing the world are listed across the pond. Their products dominate our daily lives, whether it's iPhones (Apple), entertainment (Disney and Netflix), facebook and instagram (Target platforms), or Google search (Alphabet).
He S&P 500 IndexWith its significant exposure to technology stocks, it has generated average returns of around 10% (including dividends).
Passive Income Potential
Let's assume I invest passively in both indexes and the historical returns stay roughly the same (which is not guaranteed). That's 9%.
In this scenario, you would end up with £1,159,308 after 35 years of investing just £99 a week (not including platform fees). And that's starting from scratch!
At this point, I could apply the 4% withdrawal rule. This would allow me to withdraw £46,372 per year.
Active investment
However, instead of investing passively, I have decided to take an active approach to stock picking. It is riskier and more time-consuming, but the potential rewards are much greater.
Axon Company (NASDAQ: AXON) is a great example of this. The stock is up nearly 1300% since my initial investment in 2017. It has been an incredible long-term winner and is now at an all-time high.
The company has evolved from selling Tasers to becoming a mission-critical public safety technology platform. Today, its products range from body-worn and vehicle-based cameras to cloud-based ai services and drones.
Many police officers in the US and UK now carry Axon body cameras (for accountability and evidence gathering) and Tasers (for safety and as a less lethal option to firearms). This is contracted recurring revenue for Axon.
However, the international opportunities for both products remain enormous. Market penetration in Europe, Asia and Latin America is virtually 0%.
In Scotland, police, lawyers and courts now rely on Axon’s unified evidence database. The growth potential for other countries (much larger than Scotland) if they also migrated their court systems to the Axon platform is incredible.
Of course, all of this raises data privacy issues, which is a risk. And the stocks are far from cheap at present.
Aiming for the highest
I wish all my investments had generated returns like Axon's, but the truth is I've bought some failed investments too.
However, the math is skewed in my favor because the potential gains from major stocks are theoretically unlimited.
- Axon Enterprise: +1,300% (YTD)
- Maximum loss due to failure: -100%
Even if you only made an extra 2% return on the S&P 500 (i.e. 12%), that would be enough for a portfolio worth £2,352,389. In passive income terms, that equates to £94,095 a year.
