The idea of becoming a stock market millionaire appeals to a lot of people. But it need not just be a pipe dream. With the right approach and timeframe, I think even a stock market newcomer of fairly modest means can aim for a million.
Time and money
Whether that happens will depend on three factors: how much they invest, for how long, and what the return on it is.
Here, I will discuss return in terms of the compound annual growth rate (CAGR). That is the average annual return over a set period from dividends and share price gains, minus share price losses and fees or costs. Dividends can never be taken for granted, even if a company has paid them in the past.
For example, if someone invests £600 a month and earns an 8% CAGR, their stock market portfolio will be worth over £1m after 32 years.
By the way, those fees and costs can add up, so before putting a penny into the stock market I think a savvy investor will compare share-dealing accounts and Stocks and Shares ISAs to see what one they think suits them best.
Building the right portfolio
How achievable is an 8% CAGR?
In today’s market, I think it is achievable — though of course nothing is guaranteed in the stock market.
An investor needs to keep an eye out for great businesses selling at attractive share prices. Poor decisions can hurt the long-term performance of a portfolio, so it is important to weigh the risks and spend some time digging out potential shares to buy, not just getting excited about every half-decent opportunity that comes along.
As an example, one share I think investors should consider is plant hire group Ashtead (LSE: AHT).
The Ashtead share price has soared 63% over the past five years. Over the longer term, its stock market performance has been even more impressive and it has fallen 14% so far this year.
But while renting out construction equipment has been lucrative during economic good times, could an uncertain outlook in Ashtead’s key US market lead to lower revenues and profits?
I see that as a risk. Construction is a cyclical industry and that also applies to adjacent businesses, like Ashtead, that rely on the construction industry for custom.
But I see this as a business with real long-term potential. It has a lot of experience of different economic cycles, a large customer base, an extensive collection of hire equipment, and also a strategic focus on how to keep growing.
At the moment, the valuation looks fairly attractive to me. Indeed, I recently added some Ashtead shares to my own portfolio.
The key thing is to get started!
It is all well and good to dream of investing in the stock market to aim for a million. But if that merely stays as an idea, that dream will go unfulfilled.
So a useful first step an investor can take is to decide how much money they can regularly put aside, and start laying the foundations I outlined above.
This approach could also work with less (or more) than the £600 each month I used as an example. That will change the time it takes to aim for a million.
