Generating a stable passive income to live on isn’t impossible. However, it requires the right mindset, including knowledge about the stock market and how to pick investments.
Thankfully, I believe anybody can turn £20k into £1m in around 27 years. To achieve that, I need a total return, including dividends reinvested, of 15% per year. That might sound like a lot of growth over a long time, but remember, great things take patience. The right strategy can work wonders.
How I diversify
When building a portfolio, it’s common knowledge that diversification is crucial. This is particularly true when just starting out because not much experience has been gained in the markets at that point.
Around 15-20 shares for a beginner’s portfolio sounds about right to me. The aim I adopted at this early stage was to choose top investments from many different industries. This can help to protect from losses caused by issues affecting to one field or another.
As my understanding of investing grew, I started to concentrate my holdings more. Now, I own about 10 companies across about five different industries. This helps to keep my returns competitive by focusing on the investments that have been most rewarding.
My top starter stock
After some consideration, my obvious top choice for a starter stock was Alphabet (NASDAQ:GOOGL).
The reason I love and own this investment is that it offers exposure to the high-growth technology field while not compromising on value. It has a price-to-earnings ratio of around 28, which is much lower than Microsoft‘s ratio of 38.
I think it could become the leader in developing artificial intelligence. Readers who have seen the Nvidia share price surge recently will know why I find that attractive. That’s another company crucial to AI.
However, Alphabet is also going to face a lot of competition, and its strategy could go awry. That’s why I don’t put all my eggs in one basket.
I also try to find investments that might yield me some generous dividends, which can act as both spending money and protection from market volatility.
Hunting down dividend shares
Another top investment I like and have owned for years is Games Workshop. This niche British fantasy entertainment company has a behemoth fan base now present in over 45 countries.
I’m particularly fond of these shares because they offer a dividend yield of around 4.5%. The great thing about dividends is that they increase as the share price rises. In the case of this business, if I bought the shares five years ago, I’d actually be getting roughly 14% a year in dividends on the cost I initially paid for them.
Moderation and balance are crucial for me
Even with the protective measures I put in place to try to keep my finances in check, there’s still a chance of a global recession from natural disasters or wars. At the moment, this is particularly true with global warming and geopolitical tensions between the US and multiple international regions. Or maybe the companies I invest will just go off the boil.
However, I believe the key to long-term success in the stock market is staying invested. By keeping my capital allocated to the world’s top companies, I can hopefully ride out any challenges through to brighter days ahead.
This post was originally published on Motley Fool
