The idea of becoming a stock market millionaire appeals to a lot of people. Such an ambitious target realistically requires a meaningful amount of capital to be invested, whether as a lump sum upfront, or drip fed over time.
But another critical element of whether I could be successful as I aim for a million is how I choose to invest my funds.
It may seem the obvious move would be to buy shares in dozens of companies, hoping that one of them can produce huge returns over time, like growth stories such as Spirax-Sarco or Judges Scientific have done historically.
But instead of taking a broad focus, I would keep things narrow – and buy into just a small number of blue-chip FTSE shares. Here’s why.
Quality outperforms
If I had the choice between a good car or a great one, I know which I would choose. Similarly, if I could pick between a great holiday and a merely good one, it would also be an easy selection.
Yet a lot of investors buy into companies they think are just okay, but trading at what seems like a very cheap price. Some purchase shares in firms they see as solid past performers, rather than because those businesses have outstanding future prospects.
But over the course of time, owning stakes in great companies should hopefully be a more rewarding choice for me as an investor than buying into merely decent ones. Price still matters, so I would try not to overpay even for an attractive company.
For example, if I invested £300 per month in a portfolio of shares with an average annual compound growth rate of 5%, it would take 55 years before I had a portfolio worth a million pounds.
But what if I invested the same way in a narrower (but still diversified) portfolio of shares with an average compound annual growth rate of 15%? I could realistically aim for a million in just 27 years.
Hunting for great businesses
Where might I try to find such shares? The answer could be right in front of me!
Some excellent businesses are listed on the London Stock Exchange. They may not always trade at what I see as an attractive price. But the price of shares goes up and down, even when they represent a stake in a brilliant business. So I would focus on buying such shares when I could at what I felt were attractive prices.
Such opportunities might not come around often. Brilliant companies are popular with many investors, after all. I have been waiting years to buy into great businesses like Diageo at what I think is an attractive price. But I am a believer in long-term investing. That mindset could be helpful if I seriously hope to aim for a million.
Rather than focus on promising but unproven small companies, I would look for blue-chip businesses with a proven business model. For that reason, I would mostly search among FTSE 100 companies.
Just being in the lead index does not mean a company is good. But it does show that it has achieved a certain size, which makes a good initial starting point for me to search for the sorts of blue-chip bargains I would like to find.
