How large a stock market portfolio does someone need if they seriously want to try and aim for a million? There is more than one school of thought on the topic.
Some people – perhaps from hope rather than experience – have the idea that if they invested a small amount in each of 50, 100 or even more shares, they might strike it lucky.
The idea of getting in early on the next Nvidia or Filtronic can set people’s minds (and calculators) racing when it comes to building serious wealth. But I think a different approach could offer more a less scattershot chance of success.
Investing, not gambling
Of course, if I had bought Nvidia shares early in their journey, I doubt I would now be complaining!
But I am an investor, not a gambler. To my mind, putting money into dozens or even hundreds of different shares in the hope that one or two them strike it big seems more like gambling.
After all, with such a large portfolio, how could I possibly hope to get to know the ins and outs of individual companies and assess their prospects?
While one or two shares could do well – perhaps even spectacularly well – there would likely be a fair number of duds in this approach of trying to cover the waterfront.
Zooming in on shares with brilliant prospects
That is why I think the smart way for someone to aim for a million is to do less, not more.
This can be illustrated quite simply. Over the past five years, the FTSE 100 index of leading British shares has risen 43%. But someone who bought only the best-performing 20 would have recorded an even stronger performance.
Someone who only bought the top five would have done even better.
Setting realistic goals
Of course, it is important to be a realistic investor not a daydreamer. Even with a brilliant return, someone who wants to aim for a million has a far quicker chance of success if they start with, say, £200k than if they start with £1k. I say “start with”, but that could be money they drip feed in over time.
But there is another big challenge here. Looking back over the past five years with the benefit of hindsight, anyone can see what shares did brilliantly.
But looking forward – as we must as investors – deciding what shares look most promising is a question of informed judgement, not fact.
Hunting for the right indicators
I am hanging on to my Bunzl (LSE: BNZL) shares because I hope they can do very well in the coming five years, whereas in the past five Bunzl’s share price gain of 2% lags far behind the FTSE 100.
There will be challenges. Inflation eating into profit margins is one, due to Bunzl’s complex global supply chain and the role of petrochemicals in producing some of its catering disposables like cutlery. High oil prices could hurt.
But the company has honed its business model over decades (and grown its dividend per share each year for decades too).
It benefits from a large customer base with regular needs for items from loo rolls to food trays. It has substantial economies of scale and aims to keep growing.
