The idea of becoming a stock market millionaire is an appealing one. But how realistic is it for a private investor with limited funds to aim for a million?
I actually think that it is feasible, if I have the right timeframe and use a suitable strategy. The key could be keeping things simple instead of overcomplicating them. That is why I would consider trying to grow my portfolio to a million pound valuation by investing in just 10 different shares.
From zero to a million
Imagine I had exactly zero money invested today. How could I aim for a million?
One way would be to invest a lump sum upfront and hopefully watch it grow over the years. For example, if I invested £100,000 today and it compounded at an average annual rate of 10%, I could be a millionaire in 25 years without needing to put a further penny into my portfolio.
A different approach would be to start with nothing and put money aside to invest every month. Taking that approach and putting £500 aside monthly to invest at the same average compounded growth rate as above, I would reach millionaire status in three decades.
Less is more
Annual growth of 10% might not sound tough – after all, inflation is higher than that at the moment.
In reality, though, increasing one’s portfolio value by an average 10% year after year is difficult to do. A few bad months can wipe out years of gains in the stock market. Legendary investor Warren Buffett has only managed a 10.5% compounded annual gain since 1965 in his time at the head of Berkshire Hathaway.
But I have a big advantage over Buffett. Oddly enough, my advantage (in this context, at least) is not having much cash!
It gets harder to achieve large returns when investing massive sums like Buffett does now than with smaller amounts like he did in the beginning. There are simply fewer opportunities at a large enough scale. It is no coincidence that Buffett’s best ever year increasing the per-share market value of Berkshire was back in 1976, when it more than doubled in just 12 months.
I’d aim for a million like Warren Buffett
I would learn another lesson from Buffett’s career in aiming for a million myself. Like him, I would avoid investing in lots of shares I thought could do quite well. Instead, I would invest larger amounts in a small number of shares I thought had truly exceptional prospects.
At the moment, for example, Buffett’s company has almost three-quarters of its share portfolio invested in just five companies, including Apple and Chevron.
I have less investing skill than Buffett so I would diversify my portfolio more. But I reckon owning shares in 10 different companies could give me the diversification I want to help manage risk as well as keeping my focus on a limited pool of firms I felt had great prospects. I could start putting my plan into action today, by hunting for just those sorts of shares!
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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 2022