There are many ways to earn a passive income. Lots of Britons like to invest in the housing market and become landlords. Personally, I much prefer investing in stocks and shares. While the intricacies of stocks might be more complex than buying and renting out houses, the returns can be much more appealing.
Investing regularly
If I were starting anew tomorrow, there are lots of things I’d do differently. But there are also plenty of things I’d keep the same.
One thing I’d do the same is my use of the Stocks & Shares ISA. It’s a vitally important tool for UK-based investors, allowing us to shield our profits and dividends from tax.
If I were investing £10,000 a year, or £833 a month, I’d be well within the maximum annual ISA allowance. I’m permitted to put up to £20,000 a year in the ISA wrapper.
Investing regularly is also an excellent idea. It provides my portfolio with the capacity to continue growing, and even small contributions can add up over time.
It won’t happen overnight
I’ve also got to recognise that I won’t achieve my objectives over night. One of the most powerful forces when investing is compound returns. This is essentially what happens when I earn interest on my interest. As my capital grows, my capacity to earn grows.
The thing is, bad investment decisions can also compound. And if I make poor investment decisions, I’m likely to experience losses. It’s also worth remembering that if I lose 50%, I’ve got to go 100% just to get back to where I was.
What I’d do differently
I’ve been investing for over a decade, and looking back at it, I really didn’t have much of a strategy when I started. Nowadays, I’m much more data-driven, and this has helped me achieve some really strong returns.
One stock I’ve chosen through this data-driven approach is Li Auto (NASDAQ:LI). The company may be looking a little expensive on near-term metrics compared to UK-listed stocks — it currently trades at 21.2 times forward earnings.
However, Li Auto is on an impressive growth trajectory. Earnings are expected to more than double over the coming three years. As such, the forward price-to-earnings ratios are as follows: 2024, 21.2 times; 2025, 15.7 times; 2026, 12.2 times.
Moving forward, I’d expect this momentum to be sustained. My calculations suggest the all-important price-to-earnings-to-growth ratio sits around 0.5, indicating its still vastly undervalued.
Investors may be concerned about the health of the Chinese economy and the firm’s capacity to serve international markets. However, this hasn’t proven problematic to date. Li Auto’s focus on ultra-long range hybrid vehicles has also proven hugely popular among customers wary of limited electric car ranges.
But with battery technology improving, Li has just launched its MEGA Max, touted by Li as the fastest-charging mass-produced car. The prospects, in my opinion, are strong.
So how can Li help me earn £1,421 a month? Well, it’s about the rate of growth and having a big enough portfolio. Most novice investors would be thrilled with CAGR of 10%. And if I invested £10,000 a year at 10% CAGR, after a decade, my portfolio would be generating £1,421 a month.
