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How might an investor turn a £20,000 lump sum into a passive income? With the right strategy and a few years to work with, earning a yearly income of £8,667 from that amount isn’t farfetched.
One popular approach is drip-feeding – slowly investing the cash over time to smooth out the ups and downs. But this method of incremental investing comes with a surprising drawback.
Drip-feeding
Firstly, what is drip-feeding? It’s a type of investing – sometimes called ‘pound-cost averaging’ or ‘dollar-cost averaging’ in the US – where a cash sum is invested bit by bit (or drip by drip).
When starting with a pile of cash as big as £20k, drip-feeding a few hundred pounds of it month-by-month can soften the erratic nature of the stock market. The risk of bunging all the dough in just before a sickening crash is removed, for example.
Somewhat counterintuitively, the drip-feeding approach usually leads to lower returns in the long run. A study by the popular index fund provider Vanguard crunched the numbers. Their research shows that investing the full amount all in one go wins out 68% of the time.
The old maxim rings true: ‘Time in the market beats timing the market’. Or, in other words, the best way to invest is to do it for as long as possible. That means buying early, whether it’s a small pile of spare cash or a huge lump sum.
Investors can get the best of both worlds by drip-feeding from savings from the day job. Putting in a little cash each and every month makes it easy to take advantage of stock market blips, even short-lived ones like the ‘Liberation Day’ crash. Any money invested from that March paycheque could have jumped 20% as the markets rebounded.
To buy?
One subject that gets a lot of attention these days is artificial intelligence. While the jury is still out on just how revolutionary this new tech will be, I think it’s worth mulling over AI-related stocks like Alphabet (NASDAQ:GOOG) for a portfolio – whether drip-feeding or lump-sum investing!
The owner of Google and Youtube is lauded as having one of the most robust large language models going in Gemini. On a personal note, this is my preferred AI of choice when I have a burning desire to ask wildly esoteric questions about the Hundred Years War or somesuch.
While AI may be a boon, it also represents a large threat to the company too. With 75% of sales coming from ad revenue from search engines, folks moving to chatbots to ask their questions could be a risk to its core business model.
I think the ups outweigh the downs here though. And the Alphabet finger is in other pies too like self-driving technology Waymo which already has driverless cars running in some US cities.
The stock even trades at a reasonable-sounding 30 times earnings, close to the S&P 500 average. I think it’s worth considering.
And for our passive income goal? A £20k portfolio growing at 10% yearly will pay £8,667 yearly at a 4% drawdown when starting withdrawals in the 26th year.
