Did you know that if you invest £3,000 in the FTSE 100, and then an additional £500 every month, you could be a millionaire after 44 years? You could retire on a yacht in the sun, take trips to tropical places, or spoil your grandchildren by contributing to their Junior Stocks and Shares ISA.
In theory, I think it’s all absolutely achievable because the average real return on the FTSE 100, over the last 35 years, is just over 5%. The FTSE 100 is a great place to invest to improve your wealth.
But – and there’s always a but – to succeed, you must choose which shares to buy very carefully.
This is because buying the wrong shares increases your risk of making undesirable losses, not making a 5% return, and forgoing that million.
So, how do you do it?
Buy good companies at great prices!
The first step in choosing which shares to buy is identifying good companies trading a great prices. A good company is one with a wide economic moat and sound fundamentals. A wide economic moat means the firm develops and maintains strategic advantages that keep it ahead of its peers. For example, GlaxoSmithKline‘s innovative product lineup and large number of patented drugs, make it hard for others to copy.
Sound fundamentals are data affecting a firm’s stock price in a positive way. The company will show a healthy cash flow, good returns on its investments, and low debt. For a firm to make a solid investment case, it needs to work for you long term.
Just as importantly, the shares must not be overpriced. Even good companies, when selling at high prices, will slow your returns, making it take longer to earn your million.
Choose a broad range of markets and industries
Diversification is essential for a well-balanced portfolio, and another key step in identifying which shares to buy. The reason is not to improve your gains but to stem your losses. Legendary investor Warren Buffett has two rules for stock picking, “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”.
Having an investment portfolio consisting of a variety of markets and industries will reduce your exposure to market volatility. One sector doing well can offset another one having a bad time.
Which shares to buy? Think for yourself
This is what sets a Foolish investor apart from others. I think you should invest in a company because of your own knowledge, experience, and beliefs. Just because ‘the market’ is excited about a stock, doesn’t mean you should be. Especially if you think it’s too risky.
The stock market provides us with prices. It’s constantly doing the ‘hard sell’. Only we decide whether to act on them or not. Sometimes, when the market is destroying the value in certain stocks, it’s making it elsewhere. To make our million, we have to find these value-rich bargains.
Making a million on the FTSE 100 is achievable by stemming losses, and choosing which shares to buy wisely. This means choosing great companies at good prices, diversifying your portfolio, and trusting yourself. I think you can do it!
The post How to choose which shares to buy to make a million appeared first on The Motley Fool UK.
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Rachael FitzGerald-Finch has shares in GlaxoSmithKline. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020