A lot of people like the idea of becoming a millionaire – and the stock market is a common place to try and make the dream come true. It may seem that the way to aim for a million is to invest in dozens of little-known companies and hope that one of them hits it big.
For example, Nvidia has soared 2,635% over the past five years.
Five years ago, I was already aware of the chipmaker’s growth story. If I had invested under £40,000 in its shares then, I would now be a millionaire thanks to my Nvidia holding alone.
There are several problems with such an approach however (and not just that it relies on the benefit of hindsight).
Putting all of my money into one share, no matter how attractive it seems, goes against the basic risk management principle of diversification. Secondly, loads of small companies end up going nowhere from an investment perspective – even if they have the makings of a brilliant business.
Doubling down on proven quality
That does not mean I can not still aim for a million. Far from it. But I would not try to do so by taking a scattergun approach to exciting small businesses. Instead, I would focus on proven, sizeable businesses. That does not necesarily limit me to the FTSE 100, but I would be happy to adopt a strategy that focused on FTSE 100 shares.
I would also do less not more. Rather than buying dozens of FTSE 100 shares, I would stick to a dozen – or even less.
Why? Think of it like this. Investing in the top 10% or so of FTSE 100 shares would mean my overall performance was far better than if I bought a wider selection.
Say I invested £800 a month in shares that had an average compound annual growth rate (CAGR) of 5%. I would be a millionaire in 38 years. If I took the same strategy and achieved an average CAGR of 10%, I could aim for a million in 26 years. At 15%, just two decades would be enough.
Hunting for quality
But how could I find such shares? As an example, consider FTSE 100 rental specialist Ashtead (LSE: AHT). Its share price is up 158% over the past five years and the total return has also been boosted by dividends on top of that (albeit the current yield is only 1.4%).
Five years ago, it was already obvious that Ashtead was a fine business. It had identified a profitable niche with long-term demand from customers that often had deep pockets and limited choices of supplier. It offered multiple competitive advantages, from scale of network to multinational reach enabling it to service one client in multiple markets.
Those strengths remain true today, in my opinion. But with a price-to-earnings ratio of 21, the valuation is a little too rich for my tastes. After all, returns are based not only on how good (or bad) a business is, but the price at which it is bought. Ashtead could run into heavier weather, for example, if US construction activity slows and equipment rental demand drops.
Still, its performance illustrates that the sort of share I’m looking for as I aim for a million can exist in the FTSE 100!
The post I’d aim for a million buying less than 15% of the FTSE 100! appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Ashtead Group Plc and Nvidia. 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.
