Millions of Britons invest for a second income. However, because we’re starting a little later in our lives, perhaps in our 30s, the portfolio doesn’t have a huge amount of time to mature. In the end, it may simply complement our retirement income. So, it’s less of a second income and more of a pension, just from a slightly different source.
But what if we could start earlier? We can — it’s just not always up to us. In the UK, we can open Junior ISAs, which eventually become a Stocks and Shares ISA when the owner reaches adulthood.
This means that we can start contributing to their wealth from birth. This also means many more years of compounding. It means the money we put in is compounding as she goes through nursery and through school. And hopefully, when she starts working, she’ll start to contribute to it herself.
Running the maths
By contributing £700 each month into my daughter’s Junior ISA, and assuming a 10% annualised return compounded yearly, my regular investing over 30 years has the potential to grow into a substantial sum, thanks to the power of compounding.
Over the 30-year period, the total contribution would be £252,000 (£8,400 annually). The returns, however, build exponentially.
After just one year, the balance reaches £8,796. After 10 years, it’s around £143,391. By year 30, the value reaches approximately £1,582,342, with £1,330,342 of that total being pure investment growth.
Assuming a 5% yield, this £1.6m portfolio could deliver more than £75,000 annually as a second income.
This demonstrates how time in the market compounds returns significantly. The majority of the final total does not come from my contributions, but from the returns generated on earlier returns. Market performance can vary, of course, but this highlights what consistent long-term investing can achieve.
And of course, remember that this is investing. And investments can fall in value. However, risk-aware investors can achieve life-changing returns over the long run.
Where to invest?
While I generally prefer Scottish Mortgage Investment Trust, my daughter also holds shares in The Monks Investment Trust (LSE:MNKS). Both are run by Baillie Gifford.
The Monks portfolio spans over 100 global stocks, with leading positions in Microsoft (4.5%), Meta Platforms, Amazon, Nvidia, Prosus, and TSMC among its top holdings.
More broadly, the investment trust seeks long-term growth by holding a diversified global portfolio divided into three categories. These are: disruptors (companies driving industry change through innovation), compounders (steady-growth businesses that build wealth gradually), and capital allocators (economically sensitive firms able to deploy capital effectively).
This balanced approach enables the trust to benefit from both fast structural changes and stable, enduring business models.
Performance has been strong over the past year — up 10.5%. However, it has occasionally lagged its benchmark and global peers during sharp market rotations or concentrated market rallies.
Other risks include currency fluctuations, exposure to emerging markets and private companies, and the use of gearing, all of which can heighten volatility.
However, I like the diversified nature of the portfolio and I believe it deserves greater consideration.
