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Investors looking to earn a second income might be surprised at what they might be able to achieve in the stock market. With enough time and patience, the rewards can be spectacular.
There’s always risk – and the high rewards have historically been the prize for investing in a relatively volatile asset class. But for those looking for long-term returns, considering it is a must.
Returns
Over the last 20 years, the FTSE 100 has returned an average of just over 6% a year. And you might be surprised at what that can achieve for investors over the long term.
Investing £100 a month at 6% a year generates £39 in the first year, but the power of compounding returns means this goes up over time. It starts slowly, but it gets much quicker.
In the 10th year, the annual return from investing at that rate is £893. That’s still not spectacular, but it reaches £2,548 by year 20 and then £5,513 after 30 years (although do remember that inflation will dent its value).
The difference between this and 3% – what someone might get from a savings account – is dramatic. After 30 years, the result of putting aside £100 a month in cash earning 3% is £1,673 a year.
Sometimes there’s no substitute for cash. And anyone who might need to access their capital at short notice should probably be wary of the risks associated with the stock market.
For those who are able to wait though, the rewards speak for themselves. Over 30 years, the FTSE 100’s long-term average return turns £100 a month into a £5,513 second income.
Where to invest?
For those interested in the stock market, the next question is what to buy? And for a lot of investors, this is the fun bit – owning part of a business, watching it grow, and collecting a return.
Ultimately, I think a good long-term investment needs two things: a business with a durable competitive advantage and a stock trading at a reasonable price.
Admiral (LSE:ADM) might be one of the best examples around right now. The FTSE 100 insurer has better data than its rivals and this allows it to maintain better underwriting margins.
The firm has also returned £1.59 to shareholders over the last 12 months. Based on the current share price, that’s a 5.5% dividend yield, which is above the FTSE 100 average.
One of the biggest challenges for the company is inflation. More expensive car repairs can mean Admiral has to pay out more of the cash it receives as premiums to cover claims.
Fortunately, car insurance policies tend to only last for a year, so the firm can increase prices fairly regularly to adjust to rising costs. And I think that’s a big advantage over the long term.
Long-term investing
Investing regularly over the long term is a great way to try and earn a meaningful second income. And Admiral’s the kind of stock I think might be able to help deliver this.
The company operates in an industry that should prove durable over time. Ultimately, if people want to drive their cars, they need insurance from somewhere.
An unusually strong company in a market with good long-term prospects is a powerful investment combination. So I think long-term investors could consider buying the stock.
