£500 to invest a month? Consider aiming to make that £20,000 income like this!

Investing in UK and US stocks can be an excellent way to build wealth. After a few decades, the pot of money (hopefully) built up can be enough to provide a substantial and reliable income.

Here’s what I’ll do to generate a secondary income of over £20,000.

Remove the tax

The first thing on my list would be to open an Individual Savings Account (ISA), and/or a Self-Invested Personal Pension (SIPP). I actually use both of these products to help me save on tax.

Over time, these products could increase my wealth by tens of thousands of pounds, maybe more. This is because both an ISA and SIPP save me a penny in capital gains tax (CGT) and dividend tax.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Build a balanced portfolio

I have always aimed for a well-rounded and diversified portfolio of different types of stocks. With this strategy, I can adjust my holdings based on my risk and return preferences, not to mention smooth returns over time.

For starters, a new investor might consider building a portfolio to diversify between growth and equities. I think 10-15 is a good number to aim for.

Greggs, Ashtead, again Games Workshop are examples of UK stocks that investors might consider adding to their ISAs or SIPPs. Investors may also consider backing high-growth US technology stocks like these Nvidia, Teslaagain Amazon. Although these types of growth stocks are volatile at times, they can deliver significant long-term price declines.

I think it makes sense to add some dividend stocks alongside these, so that there is a stream of income to reinvest, allowing the gains to compound over time. Companies in this bracket include Aviva, HSBCagain Halma.

Income £20k+

A quick and easy way to achieve such diversification would be to invest in an exchange-traded fund (ETF). I iShares FTSE 250 ETF (LSE:MIDD) it is one such instrument that provides a good combination of growth and dividends.

As the name suggests, it invests in the entire FTSE 250 index, which is weighted according to market capitalization. This enables investors to spread risk more effectively, while at the same time providing a wider selection of investment opportunities.

Some of the fund’s largest holdings include financial services providers Alliance Witana professional hobbyist Games Workshop, and a real estate investment trust Tritax Big Box.

On the other hand, most of the index’s earnings are generated in the UK, where economic conditions remain difficult. But on balance, I still think the fund is still an attractive investment for long-term investors to consider.

This FTSE 250 fund has delivered an annualized return of 8.4% since 2004. Past performance is not always a reliable indicator of future returns. But if this continues, a £500 monthly investment in it could turn into £507,618 over 25 years.

Such a large pension pot could deliver an income of £20,305, based on a 4% drawdown rate. And added to the State pension, this can provide a great cash flow to live on in retirement.