By Dr. James Fox

Compounding
Collectively, these actions are the basis of a promising compound returns strategy. This is the practice of reinvesting dividends over time to achieve exponential gains.

For example, if I invested £20,000 in a company with a 8% yield, at the end of the year I could expect to have £21,600, assuming the share price of the stock in question remained constant.


That’s fine, but it’s not groundbreaking. The impressive bit comes when we reinvest that dividend year after year.

Without regular contributions, it would take 38 years to turn £20k into £400k. But if I were to contribute £300 a month, and increased that contribution by 5% annually, I could get there in 21 years.

Naturally, the more I contribute, and the greater my starting figure, the easier it is to get there. And after 21 years, it’s worth highlighting that my portfolio is growing incredibly fast and I may need more than £30,000 a year in two decades’ time.

Of course, there’s no guaranteed way to build a portfolio, and I could always lose money. But if I follow these steps, I stand a good chance of turning my second income into my only income.