Make a million pounds starting in January? Sounds pretty good to me. And as inflation cools and interest rate cuts are mooted, this month might be the best time in years to aim for a big target with high-quality value stocks.
The markets are rallying. December was the FTSE 100‘s best performance for 11 months. And valuations still look low in historical terms. Here’s how I’d use this opportunity to try for that million-pound figure.
On the face of it, making a million pounds is absurdly simple. The calculation wouldn’t trouble a 13 year-old.
Assumptions
Assuming a 10% return and a 30-year timeline, I’d need £484 a month to make it to a million. That’s not to say it’s easy to save that much. Anyone who can put that much away should be applauded. It’s well above average savings rates. But it’s simple.
If I was able to pull it off, I could then collect 4% a year for a £40k passive income. A lower drawdown helps me not eat too much into my capital. I’d also hope to have more than a little left over to leave behind for loved ones.
Before I get carried away, let’s talk about the assumptions here. As I mentioned, the saving rate is one. But an even more important consideration is the rate of returns. A 10% yearly return lines up with historical averages, but past performance guarantees nothing at all.
Start investing at the height of the dotcom boom? I’d have arrived in 2009 cursing a lost decade of investments. Begin on the wrong day in 1987? I’d watch my shares suffer for years before I recovered my initial deposit. Timing matters.
Perhaps counterintuitively, the best time to invest is during poor performance. The longest bull runs throughout history have pretty much always arrived after a few weak years. And getting carried along by a flying stock market might shorten the time it takes to reach a million by years, or even decades.
Some safety
The quality of my investments matters too. Even investing at inopportune moments, good companies are good companies. And the best tend to thrive in periods of volatility or economic weakness as competitors struggle or go out of business.
Building a high-quality portfolio of 10-15 of these companies can make that million-pound goal a possibility, if not a certainty. Not all will be winners, so spreading out the investments among so many shares provides safety for the inevitable bad choice or two.
But by whittling it down to just a few firms, I can aim for higher returns. This is a cornerstone of value investing. It takes advantage of the stock market’s tendency for a few stocks to deliver the majority of the wealth gain.
With such a portfolio, I may even find my million-pound goal takes less than 30 years, or needs less than £484 a month.
