Lots of people have become stock market millionaires and some have even become billionaires through owning shares. So I think it is a realistic goal to aim for a million by investing in shares.
But how ought I to do that?
Investing serious money
If I seriously want to aim for a million, I need to be willing to commit serious money.
It is a dream, rather than a plan, to imagine that I can put a few hundred pounds at the right moment into the next Amazon or Apple and ultimately become a millionaire. That is not virtually impossible, but it is exceptionally improbable.
How much I invest depends on my own financial circumstances.
Focusing on quality
What would be better in the long run: spreading my money evenly over all the shares in the FTSE 100 or putting it into just the five to 10 best ones?
Put like that, the answer seems obvious.
Over time, investing a larger sum into a smaller number of better-performing shares can be far more successful than putting smaller sums into a greater number of shares.
A millionaire in under two decades?
Imagine I invest £100,000 in 100 shares with a compound annual growth rate of 7%, and the same amount into just 10 shares with a compound annual growth rate of 14%. The first approach could make me a millionaire – after 35 years.
The second approach, centred around 10 higher-performing shares, would see me realise my goal to aim for a million in less than two decades.
The issue is, taking today’s FTSE 100 as an example, how can I know now which shares will turn out to be the sort of great performers I am looking for?
Finding the right shares to buy
The answer is that there is no certain way to know. Even great-looking shares can disappoint, which is exactly why my plan involves diversifying across five to 10 shares rather than just putting all my money into my one favourite investment idea.
But I can look at centuries of business data and analysis to try and uncover the types of shares that tend to do exceptionally well over time.
For example, is there a huge demand that is likely to stay strong over time? Utilities like National Grid and Severn Trent look set to benefit from decades of customer demand.
Another factor in long-term success is whether a business has meaningful competitive advantages that help give it pricing power. Apple is an example: its product and service ecosystem acts as an incentive for customers to buy yet more Apple products.
I also consider valuation. Even the best business can make a bad investment if I overpay for it.
If I want to aim for a million I do not think I need to buy shares in lots and lots of different businesses. But I do need to try and find the ones likely to do unusually well in coming years!
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
Is it buy one, get one free with this FTSE 100 dividend stock?
Are cheap UK stocks a decade-defining opportunity to build long-term wealth?
8.4% dividend yield! Here’s the dividend forecast for Lloyds shares to 2025
If I’d invested £10k in Tesla stock at the start of 2020, here’s what I’d have today
This FTSE 100 stock is down 10%. Here’s why I’m hoping it falls further
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and 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.
(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)