£20,000 in savings? Here’s how I’d aim to turn that into a £46,738 annual second income

Our writer explains how he’d go about investing £20,000 in a Stocks and Shares ISA to target an eye-catching second income down the road.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Twenty grand is a good chunk of money to get started in investing. Indeed, it’s more than most start off with, and it’s easily enough to get the ball rolling towards a substantial second income in future.

If I had such a sum to invest today, here’s what I’d do.

Getting started

My first choice would be to put this money in a Stocks and Shares ISA instead of a Cash ISA. Doing so would open up a whole world of tax-free possibilities to grow my wealth faster over the next few years.

I’d be able to invest in high-quality UK dividends shares and US tech juggernauts like Amazon.

I mention the e-commerce giant because I’ve just answered the door and received one of those familiar brown boxes. It was a replacement charger for my Kindle Fire. I ordered it less than 24 hours ago!

As well as shares like these, I could also put my money in exchange-traded funds (ETFs) and investment trusts.

A FTSE 100 share

So, what type of investment would I begin with? Well, one starter stock in my ISA would be Scottish Mortgage Investment Trust (LSE: SMT).

The FTSE 100 constituent has built a portfolio of exciting growth stocks across both public and private markets. Investing in this would give me instant diversification across around 100 companies, including Amazon, Tesla, and Spotify.

I’d also get exposure to the extraordinary progress at SpaceX, whose shares I can’t buy on the public market.

Yesterday (14 March), Elon Musk’s re-useable rocket company carried out the third test of Starship, the largest and most powerful spacecraft ever.

Remarkably, it flew halfway around the globe for the first time. And this test lasted around 50 minutes compared to a combined total of 12 minutes from the previous two.

If Starship is successful, the massive payloads and reduced cost of accessing space would turbocharge the development of the commercial space economy.

SpaceX’s competitive advantage would become truly extraordinary.

Of course, this isn’t guaranteed, and there are inherent safety risks. It isn’t called rocket science for nothing!

Still, the ongoing progress at holdings like SpaceX should give a boost to the value of Scottish Mortgage over time.

Now, the shares do carry an above-average risk of volatility. That’s because many of the trust’s holdings are either highly valued or hard to ascribe an accurate valuation to because they’re private companies.

Therefore, the stock is only suited to long-term investors.

The path to £46k

By building a portfolio of such investments, I could realistically aim to grow my wealth with average annual long-term returns of 9%. That figure isn’t certain, but it is the ball-park average from stocks over the long run.

In this case, my £20k compounded over 25 years would hypothetically become £172,461 (excluding any platform fees). Not bad.

However, the real magic would come from me adding more cash along the way.

For instance, if I invested a further £9,000 a year — the equivalent of £750 a month — while still generating a 9% return, I could get to £934,769 over the same period.

From this giant sum, I could switch my portfolio to dividend stocks with an average 5% yield, leaving me with a potential £46,738 annual second income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Scottish Mortgage Investment Trust Plc and Tesla. The Motley Fool UK has recommended Amazon and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »