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Millions of Britons invest for a second income. The reality, of course, is that many of us won’t achieve our goals unless we’re really committed. In the UK, a £25,000 portfolio is actually above average. But it isn’t enough to generate a life-changing passive income.
Instead, investors may want to consider what they’re targeting and run the maths on how they can get there. So, let’s explore how an investor could turn a £25,000 portfolio into a £25,000 annual second income.
Transforming the portfolio
A £25,000 second income could be achieved with a £500,000 portfolio and a 5% yield. Of course, the question we’re all asking ourselves is how do we turn a £25,000 portfolio into one worth half a million.
The simple answer is that it takes time and consistency. A rule of thumb is that a portfolio will double in value every seven years if it grows at 10% annually. And using that maths we can see that it wouldn’t take 21 years to reach £200k and then 28 years to reach £400k.
This is where the consistency part comes in. Making regular contributions can make the world of difference. Using the exact same calculation as before, but adding in £250 of monthly contributions, would see the figure rise to £840k after 28 years. That’s more than double. And it would only take 23 years to reach that £500k target. The magic is the compounding.
The caveat here is that some investors won’t be able to achieve double-digit growth. In fact, many novice investors lose money, particularly when they chase high returns without a solid understanding of risk management, valuation, or market cycles.
Emotional decision-making, overconfidence, and a lack of discipline often lead to poor timing. This includes buying into hype near market tops and selling in panic during downturns.
I’ve said this before…
I have a fairly high conviction approach to investing, and one stock that I repeatedly talk about is Scottish Mortgage Investment Trust (LSE:SMT). The investment trust offers a rare combination of diversification and high-conviction growth investing, focusing on some of the world’s most innovative and disruptive companies — both public and private.
Its managers, Tom Slater and Lawrence Burns, seek out businesses capable of transforming industries, often backing them at an early stage. This includes household names like Amazon and Nvidia, as well as private giants such as SpaceX and Bytedance.
A key feature of Scottish Mortgage is its use of gearing — borrowing money to invest further. Gearing can amplify returns in rising markets. But it also increases losses when markets fall, making the trust more volatile than many peers. This is particularly relevant given the trust’s concentrated exposure to high-growth sectors like technology and healthcare, which can be sensitive to shifts in market sentiment, interest rates, and economic cycles.
The trust’s adventurous portfolio and gearing mean it is best suited for investors with a high risk tolerance and a long-term perspective. And while it has delivered strong long-term returns, recent years have seen periods of significant underperformance. Personally, it’s a stock I continue to top up on.
