What’s a second income worth? How much effort’s considered a fair amount to dedicate to building towards one? Many people take on two jobs to earn an extra income, waking early and working late into the night.
By comparison, putting aside a fiver a day seems like too simple of a solution. In fairness, it’s not the same as it won’t bring in any immediate income. Rather, this strategy focuses on reducing today’s expenses to secure a more comfortable future.
Set and forget
A core tenet of this strategy is ‘set-and-forget’. Once it’s set up, it can be left to do its thing without further action. All it requires is saving £5 a day and investing it into the portfolio. With certain accounts, this can be automated to occur monthly.
This is considered a good strategy for beginner investors because it avoids the risk of panic-selling. Investors lacking market experience are more likely to make mistakes by trying to actively manage a portfolio. Often, a portfolio has a better chance of growing if left to its own devices.
That is, assuming the right stocks are chosen. Volatile growth stocks in emerging industries are not the way to go here, as their futures are uncertain. A better option could be an investment trust or index fund with a long history of solid performance.
The aim’s to compound the investment exponentially until the desired amount’s reached. At that point, it can be rebalanced into a portfolio of high-yield dividend stocks. The regular payments from the dividend portfolio could deliver a steady second income.
A stock to consider
When considering a set-and-forget strategy, the usual mix of 10 stocks won’t do. Even the most well-diversified portfolio needs the occasional rebalancing. For experienced investors willing to put in the time and effort, it can be more successful. But for the aim of this exercise, an index tracker like Xtrackers MSCI World Value ETF (LSE: XDEV) may be the best option to consider.
The ETF’s enjoyed annualised growth of 8.7% over the past 10 years. Since it’s highly diversified across almost all markets in the world, it’s resilient against a downturn in any individual region or industry. Even though past performance isn’t indicative of future results, I believe its growth trajectory’s fairly reliable.
The fund aims at high-value stocks using proven metrics like the forward price-to-earnings (P/E) ratio, price-to-book (P/B) value and enterprise value (EV) ratios. However, it still has around 40% of its allocation in North America, putting it at risk if this specific region’s dips. It also incurs a total expense ratio (TER) of 0.25% which is deducted from the returns.
An investment of £5 a day could grow to around £13,600 in five years. Even with a decent dividend yield, that would only return around £100 a month of income. That’s why it’s best to start as soon as possible and think long-term. Investing in the stock for 20 years could grow the pot to £100,000. Shifting that much capital into a portfolio of high-yield dividend stocks could pay out around £670 a month.
While that may not sound like much, it requires a small investment, little effort and minimal risk. A fiver a day seems like a small price to consider.
This post was originally published on Motley Fool
