By being frugal and investing a significant portion of a salary in an ISA each month, investors can eventually establish a sizable second income stream. On average, British households save around £450 each month.
But for those able and willing to make sacrifices, almost doubling this saving rate to £830 a month can make an enormous difference.
That roughly translates to putting aside £10,000 each year to fund an investment portfolio. And if an investor can match the 8% average return the UK stock market has historically generated, that’s enough capital to build a £250,000 portfolio in just under 14 years.
The £250k milestone’s a significant one. Apart from being a critical inflexion point from which compounding accelerates drastically, it’s also the right amount of money needed to start earning a £10,000 second income following the 4% withdrawal rule.
Earning 8%
One of the easiest ways to replicate the stock market’s average returns is with an index fund. These investing vehicles also help take care of portfolio rebalancing, asset allocation, and diversification, essentially putting the wealth-building process on autopilot.
Yet lately, indices such as the FTSE 100 and FTSE 250 have struggled to keep up with their historical growth rates, instead hovering closer to a 6% annualised return. And at this rate, the journey to a £250k ISA would take closer to 16 years.
Fortunately, there’s an alternative solution – stock picking. Rather than relying on an index to build wealth, investors can take control and craft a custom-tailored portfolio of winning stocks. There’s no denying this requires far more effort. But it also opens the door to market-beating returns that could drastically shorten the wealth-building timeline.
The power of stock-picking
One of the best-performing UK shares since 2017 has been Games Workshop (LSE:GAW). The tabletop wargaming miniature manufacturer changed its strategy following the appointment of Kevin Rountree as CEO. This resulted in a much stronger relationship with the Warhammer community that’s built into a cult-like following, driving jaw-dropping pricing power.
Even during periods of economic turbulence like the pandemic and subsequent cost-of-living crisis, demand for Warhammer miniatures, books, games, paints, TV shows, and hobby tools continued to climb. Earnings have consistently hit new record highs, and the share price has since erupted by a staggering 38.2% total annual average return over the last eight years.
To put this into perspective, anyone who has been investing £830 each month in Games Workshop shares since June 2017 is now sitting on £500,000, earning a second income of £20,000.
Taking a step back
Making half a million pounds in a few years is undeniably exciting. But few UK stocks have enjoyed the same level of success. And even today, Games Workshop isn’t risk-free.
Unpopular rule changes or miniature designs could easily dent sales growth. Similarly, if younger generations opt for alternative digital-first entertainment, hobby gaming could lose cultural relevance in the long run. And the rise of affordable at-home 3D printing could also threaten the group’s ability to raise prices in the future. I still think it’s worth considering though.
That’s why diversification and risk management are crucial when executing a stock-picking strategy. And when executed well, stock-picking can lead to tremendous rewards that pave the way to a substantial second income.
