With time on our hands during the holidays, lots of people will be thinking about their long-term goals and how they can start moving closer towards them. Being a millionaire may sound well and good as an idea – but how difficult is it for someone to aim for a million in practice?
The answer is that, in the stock market at least, it might involve doing surprisingly little.
The 80/20 principle – and more
The reason is simple. It basically boils down to the well-known ’80/20 principle’ that explains how a few things (20%) drive most outcomes (80%).
That might be a couple of batsmen in the cricket team (we can wish!), a small number of blockbusters accounting for most box office revenues – or a few shares that are responsible for much of the total return in the market.
In that sense, thinking of the FTSE 100 as an example, it might be more than just an 80/20 principle. After all, by definition, the top 10 performing shares in the index over any given time period do better than the top 20.
Winnow out the bottom half of the top 10, to leave just the top five, and the performance could be spectacular over the long term.
Long-term outperformance
What might that mean for someone as they aim for a million?
Imagine someone invests £500 per month. At a 5% compound annual growth rate, it would take them 46 years to reach a £1m portfolio value.
If they can achieve a 10% compound annual growth rate, though, that timeframe will come down to 30 years. At 15%, still putting in the same £500 per month, they should be able to aim for a million after 23 years.
Focussing on just a few top performers really can have a big impact!
Choosing the right shares
How might such an approach work in practice? Even aiming to focus on the best few performers, an investor ought to keep their portfolio diversified.
It is also impossible to know ahead of time what shares will be the top performers.
Still, I think a dedicated investor can make some smart choices as they aim for a million.
One such would be choosing the best share dealing account or Stocks and Shares ISA for their own financial situation.
Another would be hunting for shares they think may have excellent long-term prospects and attractive current share prices.
One share to consider
To illustrate the point, one share I think investors should consider as they aim for a million is Games Workshop (LSE: GAW).
The share is up 72% over the past five years. It has also paid out frequent dividends during that time, although the current yield of 2.2% is one I would describe as modest rather than thrilling.
Past performance is not necessarily a guide to what may happen in future, of course.
So what do I like about the share?
It has a strong competitive advantage, thanks to its intellectual property and existing customer base of fantasy gamers. It also has a proven business model and strong profitability.
I do see a risk in its concentrated manufacturing base, if something happens to knock out production.
But now – as in the past – Games Workshop benefits from a large customer base and strong pricing power.
