Is it possible to become a millionaire over time by building a portfolio of shares? I believe it is.
But instead of investing in dozens or hundreds of companies and hoping that an obscure penny share turns out to be the next Amazon or Tesla, I would stick to just a small number of well-known, established companies. Here are my three reasons why.
Great shares are much better than good shares
Famous investor Warren Buffett tries to avoid buying shares in merely good companies. Instead, he waits patiently and invests in a small number of companies that he thinks are great.
While both sorts of firm could make for a rewarding investment over the long term, the results could be dramatically different.
Imagine the share price of the good firm grew on average by 7% each year, while the great firm managed 12%. If I invested £10,000 in both firms today, what would my holding be after 20 years? In the case of the good firm, my shares would be worth almost £39,000. But my holding in the great firm would be worth over £96,000.
By investing in fewer, better companies, I can boost my overall portfolio performance significantly. That could help me aim for a million.
Proven success
But why would I focus on established blue-chip shares rather than small companies operating below the radar that had the potential to become huge in future?
Basically, my approach is the company that has already proven its business model works and can be highly profitable is more like a bird in the hand. A firm that has a promising idea but little proven commercial success strikes me as more like a bird in the bush.
Take Microsoft as an example. If I had invested in the software giant five years ago, I would have seen my shares rise 181%, so far. In other words, I would be getting close to tripling my money in five years. But five years ago, Microsoft was hardly a small, little known firm. It had already been around for decades and its products were very widely used. As a proven blue-chip business, it was a great investment hiding in plain sight.
I’d keep buying
The performance of the companies in which I invest is a force multiplier. But the force it is multiplying is the capital I am putting in.
If I seriously want to aim for a million, no matter how good the shares I choose to buy are, I will need to invest a decent amount of money. So I would marshal my available resources and also keep adding in spare money regularly, to put to work on my best share ideas.
Finding the right shares to buy is important — but so is investing the right level of money to match my investing ambitions.
