Fancy becoming a stock market millionaire in future? I think that can actually be a realistic target for many people. It does not even necessarily involve investing in little-known or fast-growing companies. My approach is to aim for a million over time by building up stakes in just a few great companies and letting time work in my favour.
Some basic principles of stock market success
How to turn such a pipe dream into reality?
I think a realistic approach is required. I believe three things can help or hinder me depending on whether or not I have enough of them: money, time, and smart investment choices.
Time can help great investment choices show their true worth
Let’s go through those in turn.
First is money. I do not plan to aim for a million in some hare-brained scheme, hoping to put just a few pounds in the market and strike gold.
The more I invest, the easier it should be to achieve my target. Putting in £200,000, for example, I need to grow my portfolio value five times. That is not easy – but it is far easier than the 50 times growth I would need to aim for a million with a £20k investment.
So, as circumstances allow, I plan to put aside a serious amount of money on a regular basis to invest.
As for time, it can let a business show its true value and also help brilliant investments rise exponentially.
Nvidia stock has soared 180% this year. But that incredible performance actually pales in comparison to the five-year price growth of 2,175%.
Getting the right shares
Nvidia’s performance has been exceptional but it shows that a fivefold increase in value over time can be achieved.
In fact, even at the more modest annual growth rate of 10%, I could turn £200,000 into a million pounds in just 25 years.
I think 10% is achievable while sticking to well-known blue-chip FTSE 100 shares with a proven business model.
One potential strategy could be to try and “buy the index” by investing in a tracker fund. But imagine if instead of that, I weeded out the poor and middling performers and bought just the top five to 10 performing shares of coming years. My portfolio’s compound annual growth rate would likely be far better than the FTSE 100 average.
Spend time making smart choices
My Christmas stocking did not contain a crystal ball, so like everyone else I do not know what will be the best-performing shares of years to come.
But I can make choices about what shares I think could hopefully perform strongly as I build my portfolio to aim for a million.
For example, I think Reckitt (LSE: RKT) could perform well and is a stock that investors should consider.
The FSTE 100 consumer goods maker has risen 18% since July. However, that still puts it 23% below its level five years back.
Reckitt certainly has its share of risks that help explain that price fall, including ongoing litigation in the US that could eat into future profits.
But the market for cleaning and personal care products is large and resilient. Thanks to a stable of unique brands like Finish, Reckitt has pricing power.
That helps it earn profits that can be used to fund shareholder dividends.
This post was originally published on Motley Fool
