Sometimes the prospect of starting from nothing and becoming a millionaire can seem so far-fetched as to be ridiculous. But in fact, I think it is possible to aim for a million from a standing start by investing a relatively modest amount on a regular basis.
As an example, if I had a spare £100 per week to put aside, here is how I would try to build towards a seven-figure portfolio valuation.
Some ground principles
First, some principles.
To aim for a million I would focus on growing the worth of my portfolio. Part of that would involve trying to reduce the possibility of it losing value. That sounds obvious, yet many investors focus on potential rewards but overlook important risks
Another principle would be to take a disciplined, long-term approach to investment. I think it is possible to aim for a million by investing £100 a week. But it will take decades.
Discipline and compounding
Putting aside £100 per week in a share-dealing account or Stocks and Shares ISA would give me £5,200 to invest each year. The discipline of regular saving could help me grow the funds available for me to put to work in the stock market.
However, £5,200 is a long way from a million pounds! To aim for a million, I would need to buy shares that rose significantly in value, paid me sizeable dividends, or both. Rather than pulling money out along the way, I would leave any capital gains or dividends inside my portfolio to compound so they could in turn start to earn me money.
Aiming for a target
How long it took me to get to my target would depend on the rate at which my portfolio compounded.
At an annual compound growth rate of 5%, for example, I would be a millionaire after 49 years. That is the result I would be looking for – but not the timeline!
By contrast, if I could achieve a compound annual growth rate of 15%, my plan to aim for a million would be realised in 25 years.
Growth and income
The increase in value could come from one of two sources, or both of them. One is an increase in the value of the shares. The other is dividends, that I reinvest.
So, for example, if I find a share that ends up yielding 7% and also grows in price by 8% annually while I hold it, I would hit the 15% compound annual growth rate target.
That does not mean it is easy: achieving a 15% growth in one or two years is different to achieving it as a compounded average every year for a quarter of a century.
To do that I would invest in a diversified range of shares I think offer me attractive growth and income prospects over the long term.
My holding in British American Tobacco could turn out to be an example. It has an 8.9% dividend yield and sales are growing.
That might not continue, though, as fewer people take up smoking cigarettes. Allowing for such risks is why I do not concentrate my portfolio in just one or two shares, no matter how attractive they may seem to me.