Despite popular belief, investors don’t need a mountain of money to start their investing journey to earn a second income. In fact, putting aside just £300 each month, or roughly £10 a day, is more than enough to start building wealth in the stock market.
By regularly investing small amounts each month, the long-term rewards of compounding can be jaw-dropping.
For example, let’s say I was to buy a basic, boring FTSE 100 index tracker fund. Assuming the UK’s flagship index continues to deliver its long-term average return of 8% a year, investing £10 a day would result in a £1m portfolio after 40 years. And by following the 4% withdrawal rule, investors can earn £40,000 a year in passive income.
Obviously that’s a long time to wait to gain millionaire status. And if the FTSE 100’s future performance falls short of expectations, I could be waiting a little while longer. But there are ways to accelerate this journey significantly.
Minimising investing fees
Finding a spare £10 a day isn’t easy for every household. And in some circumstances, it could require making a few sacrifices. However, given the average monthly savings in the UK is around £450, building long-term wealth in the stock market should be achievable for most individuals.
However, while it’s possible to drip-feed £10 into stocks each day, this may not be very prudent. Why? Because every time an investor buys or sells shares, there’s a transaction fee.
So to minimise expenses, it’s far more sensible to put £10 into a savings account each day and let it accumulate. Apart from earning a bit of interest, investors can then invest a larger lump sum in a single transaction, minimising expenses and ensuring more money ends up in the stock market rather than in a broker’s pocket.
Accelerating compounding
For most investors, index investing works wonders. However, as previously highlighted, this can be quite time-consuming journey. So how can I reach the £1m threshold without investing more than £10 a day?
This is where stock picking comes to the rescue. Instead of buying a passive index fund, investors can take control and buy shares in specific individual companies. And for those who used this tactic to buy shares in Diploma (LSE:DPLM) back in 2004 have enjoyed an average annualised return of 23.4%!
The components distributor has developed itself as a critical piece of the value chain for manufacturers and life science enterprises around the globe. And as supply lines continue to get disrupted and complicated, demand for Diploma’s services continues to rise, fuelling an ever-expanding dividend.
At this rate of return, the journey to seven figures would only take 18 years – less than half the original time. Sadly, there’s no guarantee that Diploma will continue to reward shareholders so generously.
After all, with so much growth already under its belt, maintaining double-digit returns for the next 20 years will be no easy feat. And don’t forget about the operational risks Diploma has to tackle that can disrupt future growth, such as the threat of higher US tariffs.
Nevertheless, it goes to show that prudent stock picking, while riskier, can be a powerful way to build a chunky portfolio and second income stream on a shorter time horizon.
This post was originally published on Motley Fool
