Here’s how I’d invest my £20,000 Stocks and Shares ISA for a supercharged second income

I first opened a Stocks and Shares ISA last year. And it would be fair to say that I made some mistakes in my investments along the way. If I had to start over, I would learn from those mistakes and follow some solid investment rules that could lead to double the income.

I will start investing immediately

A popular phrase among investors is ‘timing the market beats timing the market’. This means that if I invest for a long time I will get a better return than if I try to predict the erratic rise and fall of the stock market.

And if I start from scratch? The earlier I start investing, the better.

An easy way to show this is to imagine that I have started investing at 16. At that age, I think I have put away £100 a month from my first job. That’s £1,200 a year, a pretty modest amount.

Now, let’s say I continue that number throughout my working life. If I invested all my savings into a Stocks and Shares ISA with a 9% return (more on that in a second), I’d be a millionaire by the time I retire at 66.

	10 years	20 years	30 years	40 years	50 years
£100 per month	£12,000	£24,000	£36,000	£48,000	£60,000
£100 per month with 9% return.	£18,972	£63,885	£170,211	£421,924	£1,017,819

I would make £1,017,819, to be exact. This amount seems incredible from just £100 per month, but it shows why investing in stocks early and for a long time works well.

There are, of course, risks when it comes to stocks. And this is why the next rule is so important.

I would reduce my risk by diversifying my stocks

Often, a company like Thomas Cook went bankrupt, and every shareholder lost most or all of their money. On the other side of the coin, if I have invested in Amazon in 2005, I have gained a 83 times return in less than twenty money.

So what is my strategy with a Stocks and Shares ISA? Well, I will look to open up a broad range of UK stocks in different sectors, at least 10 to 15. In this way, I will be well-hedged against risk. It means that I will have less chance to ‘win big’ or two, but what I am looking for is doing this for the long term.

Over the long horizon, the FTSE 100 has an average return of around 8% and so on FTSE 250 has averaged returns of around 10%. So I think 9% return is fair and what I will use in the calculation to see how big that second income can be.

How big is the second income?

Let’s say I can drip-feed £500 a month into a Stocks and Shares ISA. Importantly, this is less than the £20,000 a year limit for an ISA, which means my returns will be tax free. I will also assume that I take a ‘safe withdrawal rate’ of 4% per year as a second income.

	savings	4% Annual Second Income
1 year	£6,243	£250
5 years	£37,366	£1,495
10 years	£94,859	£3,794
20 years	£319,426	£12,777
30 years	£851,056	£34,042
40 years	£2,109,619	£84,385

The final figure is spectacular, and this is not just pie-in-the-sky thinking. Records show there are thousands of ISA millionaires in the UK.

This is more of a general guide for Yahoo than what I can 100% rely on, but these calculations help me see how saving and investing play out in the long term.

Even though I’m a few years into my investment journey now, reminders like this keep me motivated to keep putting money into my account.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor is it, any form of tax advice. Readers are responsible for doing their due diligence and seeking professional advice before making any investment decisions.