When I started out, a £25k second income was just a dream. Today I know it’s achievable. And a new ISA investor now has one big plus.
Whatever strategy one might choose, there are two things that can greatly improve investing success.
One is to start as soon as possible, and that’s the plus. Someone buying shares from the day they start work has a huge time advantage.
Not as much cash
They probably have a lot less cash to spare than an older investor though. And they’ll most likely know a lot less about what to do.
All we can do about the cash shortage is invest as much as we can, and that’s the other way we can boost our wealth. Still, every pound invested early can end up worth a lot more than a pound invested many years later.
But there’s something we can do about the knowledge thing, for sure. And that’s what we’re all about here at The Motley Fool… helping people learn enough to manage a lifetime of profitable investments.
Early mistake
However, I made one key mistake when I started with the stock market. I looked for stocks I thought were likely to soar in the short term. Surely I didn’t need many short-term multi-baggers to make my riches, I thought.
But they’re very hard to find, and I had a few wipeouts along the way. I wasted a lot of my precious early time.
If I knew then what I know now, I’d have done it very differently. I’d have bought quality FTSE 100 dividend stocks, and put them aside for the long term.
Different approach
I’d have learned that if I’d followed billionaire investor Warren Buffett. Since he took over the Berkshire Hathaway investing company in 1965, he’s made average annual returns of 20%.
Just £200 per month invested at that rate, with all returns reinvested, would reach almost half a million pounds in 20 years.
And from them on, we’d only need to take a fraction over 5% per year from dividends for a yearly £25k second income.
Growth, or Buffett?
Instead of the growth stocks from my misspent youth, I’d have done a lot better if I’d just bought Berkshire Hathaway shares. Or those UK dividend stocks.
I don’t expect many investors starting today could manage a 20% return every year. But most of them should have far more than 20 years ahead to build up their cash. And they should be able to raise the amount they can invest every month, as their careers progress.
So what difference might it make by the time our new investor is able to stash away £500 per month?
Half a million
Someone who can do that would only need an average annual return of 6.2% to reach half a million in 30 years. And just 5% taken from that should provide £25k in annual second income.
Now, there’s no guarantee we could make that much. Nothing is guaranteed with shares. But the more time we have, the less critical is our annual return. And the more years we have to recover from any down spells.
