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Turning an initial £8,800 in savings into a £20,000 annual second income is an ambitious but achievable goal. Like anything in life, it requires commitment, learning, and a level-headed approach.
So, let’s find out how it can be done.
There’s a formula for success
There are several parts to the formula, and central to it is harnessing the power of compounding effectively over time. Compounding occurs when investment returns generate their own returns, creating a snowball effect that accelerates portfolio growth. This process is fundamental for building wealth, especially when combined with regular contributions and a disciplined investment approach.
Consider an investor who starts with £8,800 and adds £250 monthly into a diversified portfolio targeting an average annual return of 7%. After 31 years, this portfolio would be worth in excess of £400,000.
At that point, withdrawing 5% annually would provide a second income of around £20,000. Increasing monthly contributions or achieving slightly higher returns could significantly impact the size of the portfolio over the long run.
Regular contributions are crucial because they boost the investment base, allowing compounding to work on a larger amount. Even modest monthly additions accumulate significantly over decades.
It’s also worth noting what can be achieved if an investor maxes out their ISA (£20,000 per year of contributions) and achieves a higher but achievable 10% annualised growth rate. Using 31 years as a comparison point, the below chart shows £8,800 transform into £4.6m.
Of course, this is just an example. Many novice investors lose money chasing get-rich-quick dreams. And I appreciate that I could fall short of 10% annualised returns.
A stock for the job
While I have a diversified portfolio of individual stocks, a core part of my portfolio is an investment trust called Scottish Mortgage Investment Trust (LSE:SMT). I believe it’s an opportunity investors should consider for the long run.
Scottish Mortgage offers access to a portfolio of global growth companies, with major holdings including MercadoLibre, Amazon, and Meta Platforms, as well as private companies like SpaceX.
The trust’s long-term approach has delivered strong returns. It recently outperformed its benchmark thanks to exposure to artificial intelligence and technology leaders.
However, there are risks. The trust employs gearing — currently around 9% — which can amplify both gains and losses, making it more volatile in turbulent markets.
Another consideration is the persistent discount to net asset value (NAV), which stands at about 10%–11%, despite significant share buybacks aimed at narrowing this gap. This may reflect investor concerns about getting their hands burned twice after the stock slumped in 2021. It may also reflect concerns about the valuation of private companies within the portfolio.
As such, Scottish Mortgage is higher-risk choice for patient, long-term investors. In the long run, I believe it’s likely to outperform the market. But in the near term, I’m braced for volatility. In fact, I typically use pullbacks as an opportunity to top up my position.
