Becoming a millionaire with UK shares is a relatively straightforward process. Over the long term, consistently investing in flagship indexes like the FTSE 100 or FTSE 250 can propel an investor’s wealth firmly into seven-figure territory.
Even if an investor can only muster £500 of capital each month, at a 10% annualised return, hitting a million will take roughly three decades. Of course, the biggest problem with this approach is the waiting time.
Sitting around for 28 years demands quite a bit of patience. And while there are limits as to how much this can be accelerated, building a concentrated portfolio of the best British shares could grow into £1m much faster. In fact, if an investor can hit a 15% annualised return, it’s possible to wipe out nearly a decade from the waiting time.
Of course, this is far easier said than done. And reaching 15% consistently is quite an endeavour that usually ends in failure. Nevertheless, several have succeeded, building immense wealth in the process. With that in mind, what are the key tactics to hitting this threshold?
Quality over quantity
Building a concentrated portfolio still demands patience. While the returns may be higher, finding the companies capable of delivering such gains doesn’t happen overnight. In fact, it could take months or even years to finally stumble upon the best and brightest UK shares.
While stock screeners can help eliminate financially compromised enterprises from consideration, they can only go so far. That’s because financial health doesn’t guarantee market-beating returns. After all, just because a company is an industry leader today with the best profit margins doesn’t mean it will stay that way over the next decade or even longer.
This is where it’s worth studying the stock-picking strategies of investors who have achieved such impressive gains over the years. Warren Buffett, for example, is currently sitting on average annualised returns of 19.2% since the 1960s!
So, what does Buffett look for?
Being financially robust is important. But to stay that way, a company needs to have a unique competitive edge that it can sustain and grow over the long run. That way, the group can stay on top even if a disruptive start-up emerges.
Competitive advantages can come in many forms, from a powerful brand to sticky customer relationships. And the more advantages a company has that others can’t replicate, the higher the chances it can steal market share, grow earnings, and boost shareholder wealth.
Expect the unexpected
Diversification provides ample protection against sudden disruptions to enterprises. After all, the adverse impact of one firm failing can be mitigated by the others. In a concentrated portfolio, this protection doesn’t exist. Therefore, investors must carefully investigate the threats to each candidate stock internally and externally.
This is where a margin of safety enters the picture. Even if an investor discovers a marvellous business, the risk profile may be prohibitive unless the stock trades at a significant discount.
Finding the perfect combination of low risk, cheap price, and fantastic quality is rare. And even the most diligent investigation can overlook a factor that later evolves into a massive problem. But by taking a disciplined think first, act later approach, unlocking substantial market-beating returns is possible. And even if an investor falls short of the 15% target, even an extra 2% can work wonders in building wealth faster.