Getting into the stock market, some people hope to aim for a million by turning a small stake in some incredible company into a seven-figure investment.
That may happen from time to time, but it is very rare. I think it makes more sense to take a rational approach to investing based on things that seem to have a decent chance of happening, rather than on events that could pay off massively but in reality only have a small chance of coming to fruition.
So, as I aim for a million over the long term in my portfolio, my approach is to focus on a few, well-known shares. Here I explain why.
Quality over quantity
The idea of finding a small, little-known firm with a share price that soars has obvious appeal.
But, investing in lots of companies hoping that one of them may be the next Nvidia means the amount available to invest in any one share is limited. Meanwhile, the risk profile of the overall portfolio could be higher than if sticking to proven businesses.
While some tiny startups go on to massive success, most do not.
Why a few star performers can turbocharge a portfolio
Warren Buffett has put much of his success in investing down to a long-term timeframe and a great decision every five years or so.
The maths make sense. Imagine an investor invests in £100,000 in 50 shares and they compound at 5% annually. It would take 48 years for the portfolio to be worth a million pounds.
But what is that investor invested in just the best five to 10 of those shares and was able to achieve compound growth of 15% annually?
In that case, the plan to aim for a million would be realised after just 17 years.
Getting serious about making money
Before I go on to discuss how I hunt for shares that perform brilliantly, it is worth making a couple of points about this example.
It requires a long-term timeframe. It also foresees investing £100k, which is a lot of money. The same approach could work with less money, but would need a longer timescale.
But this is not some get rich quick scheme. It is a serious approach to aim for a million in the stock market.
Looking for shares to buy
While a 15% compound annual gain may not sound very difficult to achieve, it is actually pretty tough, especially over the long run. So I look for shares I think have a sustainable competitive advantage in an industry I expect to benefit from long-term demand.
To Illustrate, consider Ashtead Group (LSE: AHT). It has more than doubled in the past five years and also has a dividend yield close to 2%.
Construction equipment rental is an area that is likely to see high demand over the long run, as was the case five years ago. Back then, Ashtead had an extensive depot network and large customer base that gave it a competitive advantage. It still does.
Past performance is not necessarily a guide to future performance. Ashtead faces risks such as a possible downturn in construction hurting rental demand.
So, for now, I have no plans to invest. But understanding its strong performance in recent years can hopefully help me as I aim for a million.
This post was originally published on Motley Fool
