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One of my key investment objectives is to enjoy a large and sustainable second income. Of course I’m not alone in my quest.
Sourcing a passive income with little or no effort is the Holy Grail of investing. And I think building a portfolio of shares, funds, and trusts is the best way to try and achieve this.
If my investments work out, I can sit back and watch the cash flow in once I’ve selected what to buy. I’d have to keep an eye on my portfolio and reinvest any dividends I receive, at the very least. But the rate of return I could potentially enjoy makes this light work worthwhile.
Indeed, the past performance of UK and US stock markets suggests even a modest £300 investment per month might give me the second income I crave.
Sensible strategies
Since 1974, British shares have delivered an average annual return of between 7% and 8%. The return on Wall Street stocks sits at an even-better 10% to 11%.
Stock markets can be volatile at times. It’s unavoidable, but taking a long-term approach means investors can ride out tough periods to generate strong eventual returns. It’s a strategy that Warren Buffett’s $140bn-plus personal fortune is build upon.
Share pickers can also mitigate wild periods by building diversified portfolios. Owning, say, 10-15 stocks spanning different geographies and sectors can provide a smooth return across the economic cycle.
A rising gold, stock, for instance, can offset the impact of a falling retail stock during economic downturns.
Top trust
The Baillie Gifford US Growth Trust (LSE:USA) is a financial instrument I’d consider if I was building my portfolio from scratch.
This investment trust offers investors with excellent diversification without having to buy lots of stocks at once. It holds shares “predominantly in listed and unlisted US companies which [it] believes have the potential to grow substantially faster than the average company“.
Baillie Gifford’s trust enjoys a large weighting of multinationals that span many sectors. Major holdings include microchip manufacturer Nvidia, space technology developer SpaceX, and payments specialist Stripe.
On the downside, the trust’s ongoing charge of 0.7% is higher than many other growth-focused trusts and exchange-traded funds (ETFs). This in turn could take a big bite out of my earnings.
Its growth-based portfolio could also underperform during downturns. However, the excellent returns it’s already delivered make it worth a close look in my opinion.
A ~£23k passive income
Since its creation in 2018, the trust’s share price has risen 114% in value. That equates to an average annual return of 12.1%.
Past performance is no guarantee of future returns. But if the trust’s form continues, a regular £300 monthly investment would turn into £573,749 after 30 years.
At this point, I could enjoy a £22,950 annual passive income if I drew down 4% per year.
With interest rates dropping, and President-elect Trump pledging to cut tax and regulations, now could be the prime time to consider growth trusts like this.
