This is how you would invest £20,000 in a stocks and shares ISA to earn passive income for life

I don't think there is a better way to generate wealth than through an ISA. The thousands of people who became millionaires in their stocks and Shares ISA last year will agree. And an initial bet of £20,000 could give me a surprisingly large passive income, as we're about to find out.

But a stocks and Shares ISA doesn't automatically generate free money. While stock markets have an excellent track record when smoothing out the ups and downs, many investors lose money or earn lower returns.

What's the difference between losing money and creating a passive source of income for life? It all comes down to one thing. How I invest.

Cash in parking

Take the FTSE 100 For example. I could invest my £20,000 in a FTSE 100 index fund and get an average of all the stocks in the index. As the UK's 100 largest public companies grow, make money or pay dividends, I collect money.

The Footsie has a historical profitability of around 7%. Sounds pretty decent. Is it time to park my £20,000 on one of these? Well, this is how my money could grow throughout an investing career.

Ok, so over an investment schedule my £20,000 grows to £152,000. That's pretty good and I would then withdraw at 4% to get a net passive income of £6,089 each year. Nothing bad. But what if we could do better?

The stocks and Shares ISA gives me a lot of freedom to do this. I don't need to limit my investing to “boring” total market funds. With modern brokerage apps, in seconds I can own a share in almost any public company on the planet.

With so many companies to choose from, I might start by looking for companies in my area of ​​expertise. By looking at the companies I know and use, I better understand the products sold and customers' purchasing motivations.

Personal experiences can help you spot quality companies even more than a bunch of numbers in a 100-page business update. As famous investor Peter Lynch liked to say: “buy what you know”.

Rewards

Of course, this style of investing poses risks. The fewer stocks I buy, the more exposed I am to recessions. A strategy like this is safer with secondary participation to other sources of income such as a pension.

But the rewards can be extraordinary if I succeed. With good but sensible stock options, you could aim for a return of 11%. Here's how my £20,000 ISA would grow at this new rate of return.

Now my stock picks have increased cash profits to almost half a million. My excellent ISA looks impressive on its own, but with a 4% return I could get £18,314 a year.

This passive income is all the inspiration I need to keep looking for more quality stocks for my ISA.