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There are many ways to earn a second income. It could mean a second job or becoming a homeowner. However, in my opinion, and probably in the opinion of some of the richest people in the world who have made their fortune investing, stocks and shares are by far the most lucrative way to earn a second income.
An income greater than my salary
If I wanted to turn £20,000 in cash into a second income larger than my salary (let's say I earn around £50,000 a year), I'll have to be pragmatic.
If I were to invest all that £20,000 in my favorite dividend stocks, American Nordic tankers, you would only receive £2,350 a year. It's an incredible dividend, but it's a long way from £50,000.
As such, I must acknowledge that it will take time before I can get close to that.
the special recipe
Twenty thousand dollars is a great starting point, but I'll need around £500,000 to generate £50,000 a year as a second income.
So how do I get there? Well, with a combination of informed decision making, regular contributions, and reinvestment, I can see my wealth grow dramatically in a matter of decades.
It is worth noting here a mathematical rule for investment growth. If I divide 70 by my portfolio's growth rate, I'll know how long it takes for my portfolio's value to double in size.
In other words, if my portfolio grew by 10% a year, which is the lower end of my personal targets, then my £20,000 would double in value after seven years.
This is the magic of compound returns. It is something that all investors should understand thoroughly. Basically, it tells us that as our portfolio grows, so do our annual returns.
Clearly it would take a while to double it to 10% to reach £500,000. That's why I need to make additional contributions, preferably monthly, to grow my portfolio.
If I contributed £200 a month to my portfolio, I would reach £500,000 in 25 years. If I had to add £500 a month, it would only take me 20 years.
The best option for growth
In order for my portfolio to grow 10% annually, I have to choose stocks that are significantly undervalued. That's why I invest in companies like GigaCloud Technology (NASDAQ: GCT).
The stock is up 400% in the last 12 months, but I think it's still undervalued by at least 25%. The stock currently trades around 12.3 times forward earnings and has a price-to-earnings-to-growth ratio of 0.6. That's very attractive.
GigaCloud is a Chinese company that many consider American. Its name is also a bit misleading. The company connects large package manufacturers (mainly furniture) in Asia with buyers and resellers in North America and Europe. Apart from this, it is also facing some hurdles in the form of disruptions in global shipping.
However, it is a very interesting and attractive business, even if it has nothing to do with cloud technology. In addition to connecting manufacturers and buyers, GigaCloud offers logistics services. It is a novel business model that reduces the time that unsold products remain in warehouses.
So far it has proven to be a solid investment for me and I hope it continues to boost my portfolio.