The idea of becoming a stock market millionaire is not just a pipe dream. Many people achieve it in real life. But many do not. I think it is possible to aim for a million buying shares. But to achieve that requires realism and discipline.
If I seriously wanted to aim for that goal, here are three things I would do to improve my chances.
Invest the right amount
Any investor’s returns in the stock market depends upon a couple of factors. How much do they invest and what is the rate of return?
Obviously, getting a rate of return far above average could boost my performance, although in practice it can be difficult to achieve. But no matter how well I choose shares to buy and hold, without putting a fairly serious amount of money into shares, I am unlikely to reach my target.
Imagine I can achieve a compound annual growth rate of 15%, for example. If I put in £100,000 today and managed to achieve that, it would take me 16 years to have a million-pound portfolio.
Putting more money in earlier can help me aim for a million. That can be a lump sum, or if that is not an option, then I can get into a regular saving habit. Either way, if I seriously hope to aim for a million, I will need to be willing to commit a serious amount of money to the project.
Take the long view
Sixteen years may sound like a long time. Then again, if putting £100,000 into the stock market 16 years ago (back in 2007) could have already made me a millionaire by now, I might see things differently!
But whether I want to aim for a million or simply build wealth on a more modest scale, taking a long-term approach to investing could help me.
That is because finding great companies in which to invest can become more rewarding over time. If a company does well year after year, that can add up to substantial gains over the long term.
JD Sports is up 26% in the past year, but has more than doubled over the past five years. Halma is down 1% in the past year, but up 90% over five years. Spirax-Sarco has fallen 2% in the past year, but gained 95% in five years.
Among top performing shares, time is typically an investor’s friend not enemy.
Focus on quality
Even a great company can stumble though. So whether I want to aim for a million or just put a small amount of spare cash to work, I always make sure to keep my portfolio diversified.
With a long-term perspective I also think the value of focusing on quality becomes even more obvious. In the short term, a very risky share can sometimes do well. But over the course of a decade or more, many risks will come home to roost. Going through the whole economic cycle, a company’s business model will be tested.
So I look for shares in businesses I think have outstanding prospects and are priced attractively, even when I consider the long-term risks involved.
