Have you at some point thought about what might be a realistic, achievable way to aim for a million?
For many people, the stock market seems like it could be an option – and indeed it could.
But there is a mistake some people make when trying to become stock market millionaires.
Magnifying not diluting the winning effect
I understand why they make that error.
They reckon that if they can identify a future huge winner – the next Tesla or Nvidia (NASDAQ: NVDA), as it were – it could give them massive returns.
So far, so good. But it is the next step in their logic that hinders rather than helps them to aim for a million.
To increase their chance of finding the next big thing, they spread their choices very widely.
Why could that be a mistake? After all, it does increase the chance of owning a share that does brilliantly.
Well, the problem is that if it is only a tiny part of a huge portfolio, then the impact of that will be limited.
Take Nvidia as an example, with its 1,167% price gain over the past five years.
If someone spread their portfolio evenly across 100 shares five years ago, with Nvidia as one of them, Nvidia’s price gain would only have added 12% to their total portfolio value.
But if, instead, they had bought just 10 shares in equal amounts, one of them being Nvidia would have led to a 120% gain for the portfolio. In other words, Nvidia’s gain alone would have more than doubled the value of the portfolio compared to what was invested.
Millionaire making at a faster clip
Of course, the other shares could also have had an impact. And, a weak performer would have more impact if it was a tenth of the portfolio than if it was a much smaller part.
But the point is clear: a large number of shares will perform less well than just the five to 10 best-performing of them.
By concentrating on them, it becomes much easier to aim for a million.
Say someone invests £20k a year and invests it in 100 shares with a compound annual growth rate of 5%. They will hit the million pound valuation mark after 26 years.
Investing the same amount but in just 10 shares with a compound annual growth rate of 10%, it would only take 19 years to aim for a million.
Hunting for brilliant shares to buy
Ahead of time, though, it can be difficult to identify what shares might be the strong performers.
First things first, though. Over the long run, fees and commissions can eat into growth rates. So someone who seriously wants to aim for a million will carefully weigh up different share-dealing accounts, Stocks and Shares ISAs, and trading apps.
Helpfully, success can leave clues.
Nvidia has done so well because it has a huge (and fast-growing) addressable market and competitive advantages such as proprietary technology and a large installed base of users.
Nvidia also had (and still does) a proven business model. Some companies can make big sales, without making money. But the chip giant has both sizeable revenues – and huge profits.
Still, I am not tempted to buy Nvidia stock today as its valuation is a bit high for my tastes. AI demand may turn out to be less than expected over the long term, or a competitor could develop much cheaper chips.
