I’d be more than happy to have 20 grand to start investing today. It’s easily enough to work towards a substantial tax-free second income.
If I had this amount, here’s what I’d do with it.
A whole world of options
My first move would be to start a Stocks and Shares ISA. Doing so would shelter my gains from tax, as well as open up an ocean of investing opportunities to help grow my wealth over time.
I’d be able to buy high-quality UK dividends shares like HSBC or growth stocks such as Amazon.
I mention HSBC because, despite being a shareholder, I’ve never banked with the FTSE 100 firm. But I recently saw a decent introductory offer for new customers, so I may jump ship from my bank.
Meanwhile, e-commerce juggernaut Amazon needs no introductions. It’s on course for $1trn in revenue (that’s a one followed by 12 zeros!) inside the next decade.
Hardly a couple of days go by without me ordering stuff from Amazon. Yet I’ve strangely never owned any shares despite being a long-time customer.
The stock is up around 1,100% in 10 years, so this has been a silly omission from my portfolio.
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A FTSE 100 share I’d consider
So, what type of investment would I start with? Well, one that I’d stick straight in there would be Scottish Mortgage Investment Trust (LSE: SMT).
This FTSE 100 fund has built a portfolio of exciting global growth stocks from both public and private markets. Unlike me, it wasn’t slow to invest in Amazon. In fact, it first bought shares way back in 2005!
Putting my money into Scottish Mortgage shares would give me instant diversification across about 100 companies, including Nvidia, Spotify, and Facebook and Instagram parent Meta Platforms.
Plus, I’d get rare exposure to private company SpaceX. The reuseable rocket company continues to run rings around its competition and was valued at a record $210bn back in June.
Since then, SpaceX has facilitated the first ever privately-funded spacewalk. The next big mission will be a return to the Moon, then eventually Mars to make humans an interplanetary species.
One thing to bear in mind here is that the portfolio is heavily tilted towards high-growth stocks. If the market turned bearish on these, the trust’s shares would likely struggle.
Still, I’d expect the ongoing growth at top holdings like Amazon and SpaceX to be reflected in a higher value for Scottish Mortgage over the long run.
Getting to £83k
Through a portfolio of such shares, I reckon it’s realistic to aim for an average 10% return. This is the ball-park average from stocks long term.
In this scenario, my £20k compounded over 30 years would become £348,988 (not including any platform fees). That would be a fantastic result, although it’s not guaranteed.
However, if I were to also add money along the way, my end result could be utterly transformed.
For instance, if I invested a further £8,000 a year — the equivalent of £666 a month — while still generating that 10% return, I could get to £1,664,940 over the same period. Incredible!
Then, I could focus on income stocks (making sure my portfolio is diversified because dividends aren’t a sure thing). With just a 5% yield, my portfolio would be generating an £83,247 annual second income.
