How to create a second income by investing

No-one wants to make a dud investment that costs a bunch of cash but doing nothing with your money has long term consequences.

If you don’t want to work forever, investing is something you need to get right. Smart investing will help you build a second income, grow your wealth, and create financial security for years to come.

If you started investing with no savings and invested just $1,000 per month, your money would have turned into $180k, $600k, $1.56m, or $3.84m over the last 10, 20, 30, or 40 years respectively. All this by investing into the Australian share market All Ordinaries Index (via the ASX long term investing report).

As you can see from these numbers, the combination of time and money is a powerful thing. The best time to take action was always 10 years ago, but the second best time is today.

But getting started with investing can be confusing, overwhelming, and just plain scary. You don’t want to make a mistake that costs you a bunch of money and be that person that blows up their hard earned cash with a dud investment.

But the unfortunate consequence is that most people end up so unsure they end up burying their head in the sand and put investing off to a tomorrow that seems to never come around.

But, if you fall into this trap you’re missing the opportunity to start getting ahead and building your money momentum. In this piece I cover the five steps you can follow to create a cracking investment plan and build a passive investment income with confidence.

STEP 1: BALANCE BETWEEN GROWTH AND DEFENSIVE INVESTMENTS

Growth investments include shares and property that grow over time. The alternative is defensive investments like cash, term deposits and bonds that aim to get you income as opposed to growth. Finding the right balance here will be a big driver of how quickly your investments will grow.

If you’re investing for the shorter term, conventional wisdom (and historical market performance) suggests you should have more of a focus on stable investments like cash. But if you’re investing for the longer term, you have the time to ride out the highs and lows of the market that come with growth investments.

Educating yourself on the timeline of different investments and the right mix of investments for your goals and targets is the first big step in setting up your portfolio for success.

The combination of time and money is a powerful thing. Picture: iStock

STEP 2: UNDERSTAND YOUR RISK

When you invest, risk comes from a number of different areas. You have big company vs small company risk, timeline risk, investment style risk and the lifestyle risk that comes with choosing investments inconsistent with changes in your personal situation over time.

Risk is ultimately what makes you money. Investing into shares is risky, buying property has risk, and doing nothing has its own risks involved.

The key is understanding your risk and including the acceptable risks while avoiding the risks that are unnecessary or unacceptable for you.

STEP 3: CHOOSE YOUR INVESTMENT STYLE, ACTIVE VS PASSIVE

This step is all about getting the right investment approach and choice of investments. There are two broad categories you can choose, either ‘active’ investing or ‘passive’ investing.

Passive investing involves choosing investments that track the overall share market.

The alternative is active investing where you (or your investment manager if you’re using a fund or ETF) is actively trying to perform better than other options.

Choose carefully here, and both approaches have their merit. You should know the stats show that over 75 per cent of active investors fail to outperform their passive counterparts over the long term.

And given nobody really knows what will happen in the future, the active investing ride can be a little more stressful than the alternative.

STEP 4: LOOK AHEAD

Take the time to look at the impact of investing different amounts over the next five, 10, even 20 years or more into the future. There are a heap of online tools and calculators that can help you understand the possibilities for you, which can be a good way to motivate yourself to drive results.

STEP 5: TAKE ACTION

Investing is important but it’s rarely urgent so easy to put off, but it won’t just happen on its own. You need to push through the information overload, set your strategy, and educate yourself to build the confidence to take action.

Like anything important, the first step is always the hardest, but once you get started you’ll immediately start building momentum that can be leveraged to drive better results.

THE WRAP ON INVESTING

When you invest there are some things you need to be across to get the results you want. Take the time to understand what makes the right mix of growth vs defensive investments, understand your risk, choose your investment style, and look ahead at the impact of investing on your financial position into the future.

Once you’ve done this you’re ready to take action and get started. The result will be a rock-solid investment plan you can be fully confident will actually deliver for you.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, author of the Amazon best-selling book Get Unstuck: Your Guide To Creating A Life Not Limited By Money.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.