Image source: Getty Images
Contrary to popular belief, investing in UK shares to build a second income doesn’t require significant monthly contributions if an investor is consistent. With only £200 a month, it’s possible to set an investment portfolio on track to deliver £20,570 passively each year.
What’s more, thanks to the stock market correction in 2022, plenty of top-notch stocks within the FTSE 250 are trading at juicy discounts. And buying high-quality businesses below their intrinsic value is a proven recipe for long-term success.
Buying quality shares for the long run
The stock market as a whole has a perfect track record of recovering from even the worst financial catastrophes. However, that doesn’t mean all listed businesses are destined to bounce back. In fact, many UK shares, including large-caps, have collapsed over the years due to weak financial health and poor leadership.
Even if a firm is financially robust and capable of recovering, that doesn’t mean it will deliver market-beating or even market-meeting returns over the long term. After all, businesses don’t exist in a vacuum. There are constant threats from competitors trying to steal customers and, in turn, market share. So how does a company protect itself?
There are multiple tactics available. However, the most sustainable strategy is to develop a wide economic moat. This involves establishing a collection of unique advantages. These can be leveraged to retain existing customers while launching a strike on a rival firm’s addressable market.
Advantages can come in many forms. They can be something as simple as a well-known brand, or as complex as a network effect or regulatory barrier to entry. Providing rivals can’t replicate similar advantages, it can become incredibly difficult to disrupt a business with a wide moat. And for shareholders, this can result in potentially decades of impressive share price and dividend growth.
Turning £200 a month into £20,570
Since the FTSE 250 was launched in 1992, the index has delivered an average annualised return of 10.6%. Thanks to compounding, investing £200 into these UK shares at this rate of return for 30 years could potentially reach a value of £514,264. Following the 4% withdrawal rule, this translates into a second passive income of just over £20,570 per year.
That’s not bad, considering the low amount of effort involved. And this income could even be bolstered further through individual stock picking. Even if a portfolio delivers just an extra 1%, that’s enough to boost the annual income by another £5,020.
Of course, this is all theoretical. There’s no guarantee the FTSE 250 will continue to deliver this rate of return moving forward. Not to mention that stock picking comes with its own set of risks, which can destroy wealth rather than create it. And don’t forget that stock market crashes and corrections also throw a spanner in the works every once in a while. That said, those corrections also give us a chance to buy quality shares when they’re temporarily cheap.
All of this is to say that investing in UK shares may be risky, but when executed diligently and patiently, it can potentially unlock impressive volumes of wealth.
