Many of us invest for a second income. That’s because stocks and shares have the capacity to multiply the value of our assets, creating a portfolio that can deliver passive income.
However, I believe many people aren’t fully aware of the impact that a strong investment strategy can have on personal wealth.
For example, a £10k investment today could easily be worth £108k in 20 years. That’s more than a 10 fold increase in wealth.
Wealth creation
Having some initial capital for investments can provide a valuable advantage. However, it’s important to recognise that we can also build a robust investment portfolio by making monthly contributions. Here’s how I approach this dual strategy:
1. Starting Capital: While having a lump sum to start with can kickstart our investment journey, it’s not always necessary. I’ve found that even with modest beginnings I can build wealth over time by consistently contributing to my investments
2. Monthly Contributions: Regular (ideally monthly) contributions are a key pillar of my investment strategy. This allows me to continually grow my portfolio overtime, but it’s also a positive saving habit
3. Pound-Cost Averaging: By making monthly contributions, I engage in a strategy known as pound-cost averaging. This approach essentially allow me to iron out fluctuations in the market by investing at regular intervals
4. Compounding for Growth: Compound returns is a powerful investment strategy. When we reinvest our returns each year, it means in subsequent years we’ll be earning interest on our previously earned interest, as well as the initial investment
5. Goal-oriented Strategy: When investing, I need to know what I’m investing for as this will impact my strategy. In turn, this impact the size of my contributions, my investment timeline, and how I withdraw my wealth
Wise choices
The above might sound like a foolproof strategy, but many novice investors make mistakes. Research is vitally important, because if I invest in the wrong companies, I could lose money.
Billionaire investor Warren Buffett’s golden rule is “don’t lose money”. I appreciate this sounds obvious, but it highlights the importance of capital preservation. If I lose 50%, I need to gain 100% to get back to where I was.
Thankfully however, investing has become increasingly democratised in recent years. There’s a wealth of resources for new and seasoned investors that can help us make informed decisions and, hopefully, avoid losing money.
If I invest wisely, I could look to achieve annualised growth in the low double digits. That’s what many seasoned investors target.
Second income
There are lots of ways I could hypothetically turn £10k in assets into £10k a year. For example, if I could achieve annualised growth of 12%, then it’d take 25 years to turn £10k into £200k. With £200k invested in stocks with a 5% yield, I could achieve £10k a year in passive income.
However, I could certainly achieve this faster if I were to contribute regularly to my portfolio. This would also reduce the need to chase double-digit growth, which could prove risky.
