The idea of becoming a stock market millionaire sounds rather appealing to me. I think it is realistically possible to aim for a million by taking three steps, even from a standing start.
1. Investing money on a regular basis
To become a millionaire from scratch will still require money. So while I may begin with nothing, I would make the point of putting aside money on a regular basis.
To do that, I would set up a share-dealing account or Stocks and Shares ISA.
I would then put in an amount on a regular basis that was substantial enough to help me aim for a million, but still within my means. Everyone’s circumstances are different. In this example I will use £980 a month.
2. Taking a long-term approach to wealth creation
The next move sounds simple but is crucial, namely taking a long-term mindset. Specifically, I would adopt a long-term approach to investing.
Whether I aim to become a millionaire from spotting great companies early on, or letting dividends pile up from well-established companies, I am hoping to invest in brilliant businesses.
For that brilliance to show through fully, whether in an improved share price, large dividends, or both, will usually take time.
3. Going for gold
The third, crucial, element of my approach is to buy shares in just a few companies. No more than 10 would be enough, I believe.
That may seem odd. After all, a lot of people hope that by spreading their money widely, they may find a real outperformer. That could happen – but it might be just a small part of a portfolio spread very thinly.
Rather than invest in loads of decent or good shares, I would prefer to buy just a few brilliant ones.
If I invested £980 a month in 50 shares with compound annual growth of 10%, for example, I ought to hit a million pound portfolio valuation in 24 years.
Imagine though, that the best 10 shares in that collection grew at a compound annual rate of 20%. Investing my money just in them, my plan to aim for a million would be realised in 16 years.
Finding shares to buy
Of course, without foresight it can be difficult to know what shares will do brilliantly versus just quite well.
Still, I believe it can be possible to make smart judgments. For example, billionaire investor Warren Buffett did not start investing in Apple (NASDAQ: AAPL) until under a decade ago. By then, it was already well-established and had been traded on the stock market for decades. The iPhone had been around for a decade.
Yet the investment has done spectacularly and is now Buffett’s largest holding, by far. Over the past five years, the Apple share price has soared 334%. That is far higher than a compound annual growth rate of 20% — even before taking dividends into consideration.
That does not mean Apple will continue doing well. It faces stiff competition and the risk of weaker demand for pricy electronics in a challenging economy.
But the principles of what led Buffett to Apple – a compelling competitive advantage, large market, pricing power and attractive share valuation – may hopefully help me find just a few shares that could perform brilliantly in years to come.
This post was originally published on Motley Fool
