Twelve thousand pounds is a decent chunk of change to build an investment portfolio with. It’s more than many people have to start with. With this capital, I’ve come up with a way to aim for a healthy second income in retirement.
Here is my strategy.
Laying the foundations
Rather than letting my money gather dust in a traditional savings account, I would maximise its potential with a Stocks and Shares ISA. This would be my starting point to grow my wealth, free from the taxman’s reach.
With this ISA, I can invest in all types of assets, including UK dividend stocks, exchange traded funds and commodities. I can even invest in US tech giants like SMCI And NVIDIA. While these parabolic gains seem attractive, building a reliable second source of income requires a less volatile asset.
I am looking for a slow-growing but highly reliable mutual fund that is diversified into a broad range of established companies.
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A highly diversified FTSE 100 trust
Scottish Mortgage Investment Fund (LSE: SMT) has been popular with value seekers for decades.
It offers investors access to a broadly diversified range of high-growth private and public companies around the world. Despite the name, the fund’s focus is on US technology stocks such as Amazon And Tesla. It also offers global diversification into South American, Asian and European markets. These companies include TikTok owner ByteDanceChinese e-commerce platform MeituanItalian supercar designer FerrariDutch chip manufacturer ASML and Brazilian retail giant MercadoLibre.
Excitingly, the private equity arm offers access to assets that most would not otherwise be able to invest in. Top names here include Elon Musk’s SpaceX and Swedish manufacturer of lithium-ion batteries Nordvolt.
Safety in the group
With investments spread across multiple regions and industries, the trust is well protected against single points of failure. However, its heavy weighting in US technology stocks such as Nvidia could spell trouble in the coming months. Increasing speculation about a possible correction (or even recession) in the US this year recently prompted me to reduce my exposure to US technology stocks.
Fortunately, such a trust offers a safer option for passive investors who want to avoid market turbulence. Although the share price has been volatile recently, it has delivered an overall annualized return of 10% since August 1994 – more than the S&P500 And FTSE100.
If this growth continues, £12,000 could grow to £240,000 in 30 years (with dividends reinvested). That would give a meagre second income of £24,000 a year for the next ten years. But if you put an extra £100 into the investment every month, it could grow to a whopping £457,000. An extra £45,700 a year over 10 years would be a comfortable retirement income!
The compromise
Of course, the reliable returns offered by mutual funds are rarely as spectacular as those offered by individual stocks. Understandably, many investors feel they can better manage their portfolio themselves. This is certainly possible, but it requires more work and can significantly increase the risk.
Mutual funds may not be the most exciting way to make money, but I like the security they offer. I already own several and Scottish Mortgage shares will be my latest addition once my payday comes in September.
The post “Saved £12,000? Here’s how I plan to turn it into a second income of £45,700 a year” appeared first on The Motley Fool UK.
Further reading
John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Mark Hartley does not own any of the stocks mentioned. The Motley Fool UK has recommended ASML, Amazon, MercadoLibre, Nvidia, and Tesla. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
