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We’d all love a second income. Just something to make life a bit easier, or something to help us afford those holidays we so desperately crave. It may seem like an impossibility. Maybe we just don’t have the time to take up a part-time job or explore buy-to-let purchases.
However, it’s a lot easier than many Britons think. Using a Stocks and Shares ISA, regular contributions, time, and a solid investment strategy, it’s possible to turn an empty portfolio into a life-changing second income.
All about compounding
When we’re starting with an empty portfolio, we need to realise that our pot isn’t going to grow without some form of contributions. The best way to make this happen is by committing to contribute regularly to my portfolio, ideally monthly, and even better if it’s done through automated savings.
By doing this, I can also benefit from something called pound-cost averaging. It essentially means by investing regularly rather than in one big chunk, I can smooth out the impact of market fluctuations on my portfolio.
However, the main investing concept I’m looking to harness is called ‘compound returns‘. This is the process of reinvesting my returns over time — or finding companies like Apple that have a strategy of investment and no dividends — and allowing my portfolio to grow exponentially. This happens because every year, I’ll earn interest on my original investment in addition to previous years’ interest.
It might not sound like a winning strategy, but it really works. And the longer I leave it, the faster it grows.
A rare opportunity
“Bad news is an investor’s best friend”, legendary investor Warren Buffett once said in a New York Times op-ed published in 2008. “It lets you buy a slice of America’s future at a marked-down price”.
In short, Buffett tells us to take advantage of fallen markets. And there’s few markets more downtrodden than the UK right now. Despite last week’s rally, the FTSE 350 remains down 1.5% over five years and UK stocks are suffering from “extreme pessimism” — not my words but I agree.
It’s also worth highlighting that much of this pessimism relates to the UK’s post-Brexit future. Despite this, 70% of the FTSE 100‘s revenue comes from outside the UK. This is just one observation, but it’s a part of the broader investment thesis as to why I’m buying UK stocks today.
While there are plenty of stocks I’m staying away from, the downtrodden market provides a unique opportunity to buy some top quality stocks at knockdown prices.
Obviously, if I pick poorly I could lose money. However, by finding undervalued stocks in this depressed market, I stand a much better chance of not only achieving a positive return, but boosting my returns substantially.
Let’s take this example. Here I’m investing £300 a month, while starting with an empty portfolio. At one end of the spectrum we can see what I’d receive as a second income when achieving a modest 6% annualised return. And at the other end we can observe how much I could earn when achieving a Warren Buffett-esque 12%.