Earning passive income from the stock market is plagued with myths. These 3 are busted!
Passive income from stocks and shares sounds great, right? But so many naysayers trot out all the reasons why it will only ever be a pipe dream.
I can’t cover all their claims. But today I want to stomp on a few common ones.
Myth 1: It takes a lot of money
Some passive income ideas might indeed cost big money to set up. Rental real estate is a common one, but that means having enough cash for a property or taking out a big mortgage. Actually, even that might not be true, and I’ll come back to it.
The stock market’s just for well-healed investors, yes? Well, no. I’ve just done a quick online search. And I see with a Stocks and Shares ISA from AJ Bell, we can invest as little as £25 monthly or make a one-off £250 transfer. That’s not unusual and it’s not a recommendation, it’s just the very first one I found.
Other ISA platforms are similar. As well as costing very little to get started, they’re easy to open. The more we can invest, the better we’re likely to do. But we really can start with modest amounts of money.
Myth 2: It’s very risky
The thought of putting our money into a company that goes bust is scary. It can happen, but we can greatly reduce the risk.
All we need to do is consider shares in a stock market tracker, like the iShares Core FTSE 100 UCITS ETF (LSE: ISF).
But don’t fear, the name is more complicated than the thing itself. It’s just an exchange-traded fund (that’s what the ETF bit means), and it spreads the cash across the FTSE 100.
Over the past five years the tracker share price is up 51%. That’s a shade below the 53% the Footsie has managed. And once we take the fund’s modest charges into account, it’s pretty much bang on.
Over the past 20 years the FTSE 100 has returned an average of 6.9% annually. If that continues, I reckon investors should expect something similar from the iShares tracker. And that, compounded for a few decades, could deliver some nice passive income.
Of course, a tracker fund shares the overall market risk. And we can lose money on them when the market falls. But the diversification should mean far less risk than from individual stocks.
Myth 3: It takes talent
Stock market investing has long been shrouded in mystery. We have to understand all sorts of big words and do complicated financial sums to have a clue, don’t we? Well, that myth has also been shattered these days. I think it’s pretty clear that investing in a simple tracker fund doesn’t require egg-head brains.
Considering investment trusts, which spread out cash using specified strategies is a common next move. Want income from UK dividend stocks? Look for one that does that. No genius required. Oh, remember that thing about real estate income? There are investment trusts that do that too.
And there’s a bonus — the more we widen our investing horizons, the smarter we can get at it.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc. 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.
