Can I reach £1m by investing just £5,000 in FTSE 100 shares? That’s what I’d like to answer today. At first glance, it sounds like quite a stretch.
But looking closer, I reckon it’s possible. Albeit with a few caveats.
From £5k to £1m
To get from £5k to £1m, there are ultimately two components. The length of time I invest for, and the percentage return I achieve.
The longer I invest, the lower my annual return needs to be to achieve my target. I calculate that if I wanted to reach my goal within 15 years, I’d need to make a whopping 42% a year. Although there are some FTSE 100 shares that have achieved this figure, it’s considerably above the 8% average for this large-cap index.
Instead, I’d prefer to extend my time horizon. If I can keep this sum invested for 35 years, I calculate that I’d need to achieve a more modest annual return of 16.3%.
One observation that I’d make is that a fifth of FTSE 100 shares managed to reach this figure over the past decade.
Winners of the future
With some diligent homework, I reckon it’s possible to pick several winners of the future.
Let’s take a look at some characteristics that I’d look for.
First, I want to find shares that demonstrate high return on capital employed. It’s the best measure of a high-quality company, in my opinion. And it’s encouraging to note that veteran investor Terry Smith agrees too.
Next, I’d look for an underlying trend that could potentially continue for many years. It could be a trend to buy or rent homes that helps property platform Rightmove for instance.
I’d also like to see a high profit margin, strong balance sheet and plenty of cash flow.
The best-performing shares are often the smaller ones. In fact, small-cap investor Jim Slater coined the phrase “elephants don’t gallop”. It’s much easier for a smaller company to double or triple in value compared to a juggernaut like HSBC.
Although the FTSE 100 includes the largest companies in the UK, there are many with market capitalisations of less than £5bn. That’s where I’d focus most of my top picks.
Which FTSE 100 shares?
There are several FTSE 100 shares that currently meet my criteria. One thing to bear in mind when I’ve got such a long timeframe is that shares can move into and drop out of the index. So although I have a preferred selection now, that might change over the coming years.
That said, right now I’d consider buying Howden Joinery Group, Dechra Pharmaceuticals, Persimmon, Rightmove, and Burberry. I reckon they stand the best chance to achieve market-beating returns to help me reach my £1m target and I’d buy them today.
Currently, they meet my criteria. But I’d need to keep an eye on them, as much can change of the years. For tax purposes, I’d also consider buying them in my Stocks and Shares ISA, rather than a standard share dealing account.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry, HSBC Holdings, Howden Joinery Group, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.