Twelve thousand quid’s a decent chunk of change to kickstart an investment portfolio. That’s more than many people have to play with when they’re just starting. With that kind of capital, I’ve devised a way to aim for a healthy second income in retirement.
Here’s my strategy.
Laying the groundwork
Instead of letting my cash gather dust in a traditional savings account, I’d maximise its potential with a Stocks and Shares ISA. This would be my starting point to turbocharge my wealth, free from the taxman’s grip.
This ISA gives me the option to invest in all types of assets, including UK dividend shares, exchange-traded funds and commodities. I can even opt for US tech giants like SMCI and Nvidia. However, while those parabolic gains look attractive, building a reliable second income stream requires a less volatile asset.
What I’m looking for is a slow-growing but ultra-reliable investment trust that’s diversified into a wide range of well-established companies.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A highly diversified FTSE 100 trust
Scottish Mortgage Investment Trust (LSE: SMT) has been popular among value seekers for decades.
It provides investors exposure to a broadly diversified range of high-growth private and public companies around the world. Despite the name, much of its focus is on US tech stocks like Amazon and Tesla. It also offers global diversification into South American, Asian, and European markets. Such companies include TikTok-owner ByteDance, Chinese e-commerce platform Meituan, Italian supercar designer Ferrari, Dutch chipmaker ASML and Brazilian retail giant MercadoLibre.
Excitingly, the private equity arm provides exposure to assets most would otherwise not be able to invest in. Top names here include Elon Musk’s SpaceX and Swedish lithium-ion battery manufacturer Northvolt.
Safety in numbers
With investments spread across several different regions and industries, the trust’s well-protected against single points of failure. However, its heavy weighting towards US tech stocks like Nvidia could spell trouble in the coming months. Mounting speculation about a potential correction (or even recession) in the US this year led me to reduce my exposure to US tech stocks recently.
Fortunately, a trust like this allows a safer option for passive investors aiming to avoid market turbulence. Although the share price has been volatile recently, overall it’s delivered an annualised return of 10% since August 1994 — higher than both the S&P 500 and FTSE 100.
If that growth holds, £12,000 could grow to £240,000 in 30 years (with dividends reinvested). That would provide a meagre second income of £24,000 a year for the next decade. But by contributing an additional £100 a month to the investment, it could grow to a whopping £457,000. An extra £45,700 a year over 10 years would be a comfortable retirement income!
The trade-off
Naturally, the reliable gains investment trusts offer are seldom as spectacular as those found in individual stocks. Understandably, many investors may feel they could do better self-directing their portfolio. This is certainly possible but requires more work and could significantly increase risk.
Investment trusts may not be the most exciting way to make money but I like the peace of mind they provide. I already hold several and Scottish Mortgage shares will be my latest addition once payday arrives in September.
