How I’d invest £200 a month in UK shares to make a £20,570 passive income for life

Investing £200 a month to generate a five-figure passive income might seem a bit far-fetched. Even more considering how badly the stock market performed in 2022. Just looking at it FTSE 250, the UK index fell 20% over the 12-month period. And there is a long road to recovery.

But now could be a good time to start buying UK stocks. After all, a diversified portfolio of investments in high-quality businesses at low prices is a proven recipe for success. And in the long run, it can unlock a second income stream.

Invest during a correction

The stock market has experienced countless crashes and corrections before. And in each scenario, it has completely recovered before climbing to new heights. That’s why buying UK stocks during this volatile period can be rewarding.

Of course, simply investing in every company that is beaten is not a good idea. Investors should selectively build their portfolio to own only the best listed companies London Stock Exchange. Don’t forget, when panicked investors tend to sell everything, there are some businesses that are worth getting rid of.

Companies with overleveraged balance sheets, unskilled management, and weak competitive moats are unlikely to produce stars. And in some cases, it may even enter the terrifying realm of bankruptcy. Needless to say, this is not the type of stock that passive investors want to own.

Instead, the focus should be on finding businesses that are experiencing only temporary disruptions with the financial resources available to overcome them. This approach opens the door to volatility. But this risk can be partially mitigated through diversification and pound cost averaging. And if successful, using this strategy can lead to market returns in the long run.

Build a passive income of £20,570

Since its inception, the FTSE 250 has returned an average annual return of 10.6%, including dividends. And that’s after factoring in the 2022 stock market correction.

Let’s assume the index will continue to produce these results in the future. Investing just £200 a month into a FTSE 250 index fund could make a portfolio worth £514,260 after 30 years. And under the 4% withdrawal rule, that translates into an annual passive income of £20,570.

Investors can take this step by selecting individual stocks, which unlock the potential for greater returns. Even if the portfolio only gives an additional 1%, it is enough to turn the same monthly investment of £200 into a portfolio of £639,760. Or, in terms of annual income, that’s an extra £5,020.

As exciting as the prospect is, it’s important to remember that investing in the stock market will never be risk-free. And when taking individual UK stocks, the risk factor is only magnified. It is possible that investors are inadvertently destroying wealth rather than creating it. Not to mention that a crash or correction over the next three decades could happen more than once.

The event will certainly create a buying opportunity, as the 2022 correction is already underway. But depending on the timing, the investor may have a portfolio and, thus, a lower passive income than expected.

However, given the potential rewards, the risk is worth taking, in my opinion.