The goal of many investors who buy ASX shares is to eventually earn a second income.
And who can blame them? Imagine receiving money in return for no work, with which you can spend on whatever you like.
But what if you had just $1,000 to start your portfolio?
Well, I would say you have a thousand more reasons to invest than someone who has nothing.
Let me show you, hypothetically, how you can turn that $1,000 into five figures of second income each year:
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Start with the grand, but you have to keep adding to it
Sure, you might only start a stock portfolio with $1,000. But if you have the discipline to save and add to this investment regularly, you will be on your way to financial freedom.
Can you manage to add $500 to the pool each month?
With careful advice and research, let's assume you can average 12% of compound annual growth rate (CAGR) through the years.
Do you think that's unrealistic? I put it to you that it's very possible.
Take S&P/ASX 200 Index (ASX: XJO) retail stalwart Lovisa Holdings Ltd (ASX: LOV) as an example.
The past five years has included many shocks to the business, such as COVID-19 and steeply rising interest rates. Notwithstanding those bumps, Lovisa shares have managed to return more than 220% in that period.
And that's the secret here. You need to be committed for a few years.
During that half-decade, there have been multiple instances when Lovisa shares have lost 40% to 50% of their value. But sticking with the stock for the long run has seen handsome returns.
The CAGR for Lovisa's share price over the five years is 26.2%.
If you look at exchange-traded funds (ETFs), something like the Vaneck Morningstar Wide Moat ETF (ASX: MOAT) provides instant diversification and decent returns.
That fund has managed a CAGR of 15% over the last five years.
There is no reason why 12% is not achievable.
Second income, here we come
Now, back to that $1,000.
Add $500 to it each month with a 12% CAGR, and these are the amounts the portfolio could grow to:
| Years of investment | Portfolio size |
| 9 | $91,427 |
| 15 | $229,151 |
| 20 | $441,960 |
The longer you leave the investment alone, the larger your second income will be.
From the point you want to stop adding and start harvesting cash, you simply sell off the 12% returns each year.
After just nine years, your initial $1,000 investment could deliver you the promised five figures of passive income. $10,971 annually, to be precise.
If you have the patience to let the portfolio grow for 20 years before sinking your teeth into it, then that second income becomes quite substantial.
How does an average annual cash injection of $53,035 sound to you?
That, ladies and gentlemen, is the power of ASX stocks and compounding.
