What exactly is ‘passive income’? A quick Google search reveals a definition of income that needs “little to no ongoing work.” That doesn’t sound too bad. Earn money without the elbow grease. What’s not to love? And yet, the simplest avenue towards building something along those lines, investing in stocks and shares, is something most people don’t even think about.
It’s very much the case all around Britain. Our population is up to over 68m these days and of those, only 22m are funneling extra cash into the ISA tax vehicles. But even of the ISA holders, only 4m of these accounts are Stocks and Shares ISA where the most powerful of passive income investments lie. Folks seem to have pretty big reasons not to invest in this way.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Rough beginnings
One of the issues of building an income through stocks is how meagre the initial returns are. A figure like 10% isn’t wowing anyone, for example. Sure, if you do the maths, then the money invested begins to snowball given enough time, but the first year or two seems fairly pointless. Anyone who can sock away £200 might not be too thrilled seeing £1.67 average return in their first few months. Is that really worth sacrificing a day at the races or a new toy from Amazon?
But the way this kind of growth works often flummoxes the human brain, even those who have experience with it. I still remember a science teacher asking the class how tall an A4 paper folded over 100 times would be. Most of us guessed in millimetres or centimetres. One crazy classmate guessed over a metre. The answer was it would reach to the moon!
Stratospheric growth from modest beginnings in investing can work too. Drip-feeding a monthly £200 at 10% might not make much after a year, but after 40 years it balloons into over £1m. While this little example is over a longer time span than many would have to work with, it shows how this growth does some bizarre-sounding things.
A popular place to start revving up exponential growth is with the big tech stocks in the US. Apple (NASDAQ: APPL) is one company I own myself and believe to be worth considering for anyone hoping to build towards a second income.
A buy?
The company is in its mature phase, true. The days of releasing a revolutionary new product every few years seem behind it and it’s hard to see the $3.4trn market cap showing much electric growth.
But Apple still makes the best electronic devices around and it’s hard to find a home without a couple of the things they make. Its ecosystem is sticky — hard to get out of once you’re used to how well their products all work together — and it has large cash levels and little debt.
Apple has been outperforming most other stocks even in recent years too. The share price has more than tripled over the last five years.
The post Why do so few people build a passive income? appeared first on The Motley Fool UK.
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John Fieldsend has positions in Apple. The Motley Fool UK has recommended Apple. 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.
