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Investing in UK and US stocks can be a great way to build wealth. After several decades, the accumulated fund of money (hopefully) could be enough to provide a plentiful and reliable passive income.
Here's what you would do to get a second income over £20,000.
Eliminate taxes
First on my list would be to open an Individual Savings Account (ISA) and/or a Self-Invested Personal Pension (SIPP). In fact, I use both products to help me save on taxes.
In the long term, these products could increase my wealth by tens of thousands of pounds, perhaps more. This is because both the ISA and SIPP save me paying a single cent in capital gains tax (CGT) and dividend tax.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Build a balanced portfolio
I have always looked for a complete and diversified portfolio of different types of stocks. With this strategy, I can adjust my holdings according to my risk and return preferences, not to mention create smooth returns over time.
To start, a new investor might consider creating a portfolio split between growth and dividend stocks. I think 10-15 is a good number to shoot for.
Greggs, Ashtead, and Games workshop are examples of UK shares that investors can consider adding to their ISAs or SIPPs. Investors may also consider supplementing with high-growth US technology stocks such as NVIDIA, teslaand amazon. While these types of growth stocks are volatile at times, they can generate substantial share price appreciation over the long term.
I think it makes sense to add some dividend stocks along with these, to give you a steady stream of income to reinvest, allowing the gains to compound over time. Companies in this group include Aviva, HSBCand Halma.
A passive income of more than £20,000
A quick and easy way to achieve such diversification could be to invest in an exchange-traded fund (ETF). He iShares FTSE 250 ETF (LSE: MEDIUM) It is one of those instruments that provides a good combination of growth and dividends.
As the name suggests, it invests across the entire FTSE 250 index, with weightings based on market capitalisation. This allows investors to effectively spread risk while offering a wide selection of investment opportunities.
Some of the fund's largest holdings include financial services providers. Witan AllianceGames Workshop hobby specialist and real estate investment trust Tritax Large Box.
On the negative side, most of the index's gains are generated in the United Kingdom, where economic conditions remain difficult. But overall, I still think the fund remains an attractive investment for long-term investors to consider.
This FTSE 250 fund has delivered an average annual return of 8.4% since 2004. Past performance is not always a reliable indicator of future performance. But if this continues, a monthly investment of £500 would become £507,618 in 25 years.
A pension fund of this size could generate a passive income of £20,305, based on a 4% withdrawal rate. And added to the State Pension, this could provide a significant stream of money to live on in retirement.
