Aim for a million with just a few shares? Here’s my approach!
The idea of becoming a stock market millionaire may seem a fantastical one without having lots of money in the first place. But in fact it is possible for someone to aim for a million even from a starting place of zero, if they take the right approach.
Being realistic about how much to invest
To do that, they could get into the habit of drip-feeding money into a portfolio of carefully selected blue-chip shares.
How much an investor puts in depends on their individual circumstances. Everyone is different. In this example, I use a sum of £800 per month.
To use the money to buy shares, our investor will need a way to do so! There are lots of share-dealing accounts and Stocks and Shares ISAs available.
I think it makes sense to take some time and choose the most suitable one. Even small-seeming fees and charges can add up over the long term, making it harder to aim for a million!
Aiming for outstanding stock market performers
How long might such an approach take before the champagne corks start popping?
Putting aside £800 per month and achieving compound annual growth of 5%, the answer is 38 years.
But wait. What if that compound annual growth rate was 10%?
Then, still investing the same £800 per month, the answer would be 26%.
At a 15% compound annual growth rate? Just two decades.
It is not easy to beat the market, let alone achieve a compound annual growth rate of 15%. But, as some investors demonstrate, it is possible.
Buying just a few great shares
Some FTSE 100 shares have achieved compound annual growth rates of 15% (or more).
Rather than buying the whole FTSE 100 index, instead an investor could aim simply to buy the five to 10 best-performing shares as they target a 15% compound annual growth rate.
Easy in theory – but what about in practice? After all, nobody ever know in advance how a share will perform.
That is true, but I also think success leaves clues. Consider, for example, equipment hire group Ashtead (LSE: AHT). Its share price has more than doubled in the past decade (and it has a 2% dividend yield to boot).
The company operates in an area of high demand. Not only that, but it has pricing power. When a building site needs a specific, critical piece of heavy plant, it needs it and will pay even a high price.
Thanks to its network of depots and proprietary stock of equipment, Ashtead is able to offer a solution in such situations sometimes with limited or no competition. Such rentals can go on for months or even years.
So, this is a simple business to understand. But it is one that benefits from high demand and has high barriers to entry in terms of the cost and complexity of building a network of depots and kitting them out with the right equipment to rent out.
There are risks, of course. A clear one is the danger of a big downturn in construction activity due to economic weakness. That could eat badly into revenues.
Still, even now Ashtead’s price-to-earnings ratio of 17 means it is a share I think an investor could consider as they aim for a million.
The post Aim for a million with just a few shares? Here’s my approach! appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Ashtead Group Plc. 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.
