Buying UK shares can be a great way for investors to build a healthy second income. It’s why I spend money building my Stocks and Shares ISA whenever I get the opportunity.
Cryptocurrencies like Bitcoin are far too volatile for my liking. Commodities like gold don’t pay any dividends. And savings accounts like the Cash ISA are infamous for their poor returns.
Stock markets, on the other hand, have provided strong and stable returns for centuries now. More specifically, British stocks have provided an average annual return of between 8% and 10% during the last decade. This reflects a healthy combination of share price gains and dividend income.
The miracle of compounding
This is the sort of range that can help regular investors make life-changing wealth over the long term. It also means that investors like me don’t need to spend a fortune to make a healthy passive income.
This is thanks to the miracle of compounding. In short, this involves reinvesting any dividends I receive to help my wealth snowball over time.
Let me show you how this could help me make big money over a 30-year timeframe. Shall we say that I can afford to invest £250 each month in UK shares over this period? If I can achieve that 8-10% we’ve seen over the past decade, I would have made between £339,850 and £493,482 with my portfolio. This is the sort of sum that could eventually make me a healthy passive income.
If I applied the 4% drawdown rule, I’d have an annual passive income of between £13,594 and £19,739. Withdrawing 4% a year can provide a healthy second income without depleting my nest egg.
Three successful investing tips
Few of us (including me) have a bottomless well of cash to draw upon to buy UK shares. And the soaring cost of living means it’s harder for investors to find money to invest.
This is where investing smarter becomes more important. A limited budget makes it more difficult to boost a bank account. So I have to come up with strategies that make every single pound I invest work as hard as it possibly can.
Doing as much research as possible is perhaps an obvious tactic. But you’d be surprised how many take the plunge without doing proper homework. Good research helps investors identify top share-buying opportunities and avoid traps that can drag on overall returns.
Diversification is another important tool when working on a limited budget. This reduces the risk of a large proportion of wealth being wiped out by one or two poorly performing shares.
Though some balance is required when it comes to diversifying my portfolio. I need to be careful not to spend a large proportion of my investing budget on transaction costs by buying too many shares at once.
Finally, it’s important that investors remain patient and remember that the most successful investors invest with a long-term view. Selling out at the first sign of trouble, or hastily cashing out to invest money elsewhere, frequently costs inexperienced UK share pickers a fortune.
2023 could be another really tough year for investors. But these steps could really help people like me to build wealth for retirement.
