How do we start earning passive income? Well, it all begins with saving. A recent NatWest report found the current average monthly savings by residents of the UK was £288 (risen a lot recently thanks to inflation). Let’s call that a round £300. Where’s the best place to put it?
There are more options than ever, these days. Cash ISAs are set to get a boost from rising interest rates. Bond yields are at levels not seen since the 1990s. Some folk will even tell you to stick it all on Bitcoin and wait a decade or two. Me? I’ve got a whole other thing in mind…
Where to invest?
The first £300 invested for someone serious about passive income should go, in my view, into an index fund like Vanguard S&P 500 ETF (LSE: VUSA) that tracks lots of different companies. This is a ‘boring but risky’ approach that will likely reap rewards over the long run.
Why risky? Because it involves investing in the stock market. Investments can lose value. A crash like that in 2008 could see those hard-earned savings fall by 50% or more. Such events are commonplace, if not inevitable. That said, a crash can mean snapping up bargains that are likely to rise later.
Why boring? Because for the average investor, it requires years of patient saving and investing before the passive income can grow to impressive levels. The majority of money made with this kind of investing is made in the final stretch. The withdrawal of income comes after years of compound interest doing its work.
Eagle-eyed readers will have noticed I mentioned an S&P 500 fund – containing most of the biggest listed American companies. Why? Because it has the best historical performance of any country (the UK is not too far behind, but still). As Warren Buffett was fond of saying: “Never bet against America.”
Other options?
Now, that’s what I think is worth doing for the first £300, but what about all subsequent chunks of £300? After all, working towards passive income is rarely a one-time thing. And the process can be sped up by making investments in companies themselves.
Nvidia shows what is possible. The US chipmaker’s shares have surged since the advent of artificial intelligence. Rolls-Royce is a similar stock closer to home, up around 15 times from a post-pandemic low.
There are extra risks involved with individual stocks, too. Years ago, I remember thinking of Cineworld as a huge (and probably safe!) British name. Luckily, I didn’t invest in it before the share price crashed to basically nothing and shareholders lost the lot. Such stories are par for the course in the stock market, which is why good research and patience is key.
Overall? The best place to put £300 based on historical returns (and excluding crypto and the like) has been the stock market. I think that will continue to be true for the future too.
Should you invest £5,000 in Vanguard Funds Public – Vanguard S&P 500 Ucits ETF right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vanguard Funds Public – Vanguard S&P 500 Ucits ETF made the list?
John Fieldsend owns shares in Nvidia and Rolls-Royce.
This story originally appeared on Motley Fool
