Making a passive income by investing money regularly in UK shares could become an increasingly worthwhile move, in my opinion. The stock market’s long-term growth potential and low current valuations could lead to impressive capital returns in the coming years.
Therefore, now could be the right time to start investing in a diverse range of British stocks. Over time, they could deliver a sound income return that provides greater financial freedom in older age than would be the case through buying other mainstream assets.
Regular investing to make a passive income
Investing regularly in a selection of UK shares has previously been a sound means of generating a passive income in the long run. The stock market’s past performance shows it has outperformed other mainstream assets. In doing so, it has helped a large number of investors to build a surprisingly large nest egg from which to draw an income.
For example, the FTSE 100’s long-term total annual returns are around 8%. Investing £100 per week in a selection of British stocks would lead to a portfolio valued at around £1.35m over a 40-year working life. Based on a 4% annual withdrawal, this equates to an income of £54,000.
While not all investors will be able to purchase £100 of shares per week, or have a 40-year time period, the example serves to show how regular investing in the stock market can lead to a surprisingly large return.
Starting to invest money in UK shares today
Of course, some investors may seek to make a passive income from other assets after the stock market crash. For example, they may be cautious about the stock market’s future prospects in what is an uncertain economic period. As such, they may purchase other assets, such as cash and bonds, to reduce risks in the short term.
However, now could be the right time to start investing money in cheap UK shares. Investor sentiment is weak towards a wide range of sectors. In many cases, companies operating in unpopular sectors have the financial means to survive a likely recession. And with it, the strategies to thrive in a likely subsequent economic boom.
Therefore, they could deliver higher returns than the market average over the long run. This could produce a larger portfolio valuation that delivers a higher annual passive income.
Being mindful of risk
Looking ahead, managing risks could be key to building a passive income over the long run. Investors should always diversify across a range of companies that operate in different sectors when investing money regularly in UK shares.
This may reduce the risk of loss resulting from disappointing performances from a relatively small number of holdings. It could also lead to an even higher portfolio valuation in the long run from which to generate a growing annual income.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.