Investors don’t need mountains of cash to start investing. Allocating just £10 a day to bargain-basement shares listed on the London Stock Exchange (LSE) could work wonders over the long term. In fact, the sum accumulated from this could lead to a very substantial second income.
The miracle of compound interest can deliver a lot of the wealth-building power for us. That’s why the famous physicist Albert Einstein reputedly called it the “eighth wonder of the world.”
The longer I feed my portfolio, the more that the financial snowballing effects of compounding start to take shape.
Saving £10 a day
The first part of the wealth-building process involves me putting money aside to invest in LSE shares.
While that has undoubtedly become harder during this recent period of high inflation, I think it’s still possible if that’s what I choose to prioritise.
Now, it might not make sense to literally invest £10 a day unless my broker offers commission-free trading. Unfortunately, many investment platforms still charge every time an investor buys and sells stocks.
Personally, I think commission fees will look as outdated as renting VHS cassettes in a decade’s time. But we’re not fully there yet in the UK, so to save on fees it might make sense to build up to around £1,000 to invest each time.
Taking advantage of dirt-cheap LSE shares
Over previous decades, the UK stock market has returned an average of between 6% and 8% per year. And at the moment, UK shares are heavily discounted.
The FTSE All-Share index trades on 10 times earnings, according to Bloomberg. That compares to 18.5 for the MSCI World Index.
This makes the UK market look ridiculously cheap, making it the perfect hunting ground to find high-yield dividend stocks. That’s because depressed share prices result in higher yields.
Right now, dozens of FTSE shares are yielding 6%-10%. I think that makes achieving an 8.5% annual return realistic.
Taking advantage of compounding
A compound interest calculator reveals that investing £10 a day (or £3,650 a year) would grow to £54,150 after 10 years. This assumes I earn an average return of 8.5% per year and reinvest my dividends instead of spending the cash.
After 30 years, my portfolio would be valued at £453,395. By this point, I could stop reinvesting dividends and enjoy a second income of £31,750 a year from just a 7% annual return.
However, if I were to let my portfolio compound another decade, it would rise to over £1m. And that would be from just a total of £146,000 of my own money.
Putting this into context, a 20-year-old could put just £10 a day aside and reach these numbers before they reach pension age.
Foolish takeaway
Don’t forget, we’ve been talking about £10 per day throughout this investing journey. If I instead increase that amount to £20 per day, then we could be talking about my portfolio being valued at more than £2m after 40 years!
Of course, individual dividends aren’t always guaranteed and nobody knows what returns the stock market will produce in future. I could earn less, or even lose money.
But by adding undervalued UK shares to my portfolio today, I’m giving myself the best chance of securing a very substantial second income in future.
