What’s the best way for me to aim for a million? This isn’t an easy question to answer.
From traditional buy-to-let properties to extremely volatile cryptocurrencies, today’s investing landscape offers a huge variety of choices. There are opportunities and risks associated with each type of investment.
Here are three reasons I buy and hold stocks for the long term as my preferred strategy to try to secure millionaire status.
1. Calculated risks
My biggest concern today is surging inflation. As the cost-of-living soars, my cash in the bank loses value every day. Rising interest rates soften the blow, but only a little. Solely using savings accounts is unlikely to allow me to build serious wealth over decades.
On the other hand, investing in stocks has historically rewarded investors with inflation-beating returns. As an example, the S&P 500 index delivered a compound annual growth rate of 10.7% per year over the past 30 years. By selecting a smaller number of stocks to buy, I hope to beat the index and accelerate my path to a seven-figure portfolio.
However, past performance doesn’t guarantee future results. There are long periods when equity markets failed to beat inflation, or even posted negative returns. This is a risk I’m prepared to take in my quest for a million.
I’m also more comfortable with the risks of stock market investing, compared to the substantial risks that come with assets like Bitcoin. Stock exchanges have been around for centuries, surviving wars, pandemics, and speculative bubbles.
Researching concrete indicators of a company’s health, such as earnings reports and price-to-equity ratios, allows me to manage my portfolio risk effectively, rather than relying on hype and excitement alone.
2. Diversification
Another attractive feature of stocks is the ability to diversify my holdings across sectors and countries. For instance, around 82% of FTSE 100 revenues come from overseas markets. Even for the FTSE 250 index, which has a greater domestic focus, this figure is around 57%.
Diversification is crucial to managing risk. I believe the stock market offers greater diversification opportunities for me compared to a buy-to-let property. As a landlord, my capital would be tied up in one asset and subject to the fluctuations of a very local market.
That’s not to say there’s no place for additional diversifiers, such as gold or bonds. However, the keystone of my investment approach is holding stocks with a long-term time horizon.
For me, equities strike the right balance between risk and reward. By reinvesting dividends and resisting the urge to sell when share prices fall, I can harness the power of compound returns and aim for that coveted million-pound portfolio.
3. Knowledge
Finally, I only invest in assets I understand. This is the philosophy advocated by legendary billionaire investor Warren Buffett.
I enjoy keeping abreast of stock market developments and carefully researching individual companies so I know what I’m buying. Investing in stocks has never been more accessible and there’s a wealth of analysis available to ensure I can stay informed.
Francis Bacon’s maxim “knowledge is power” rings true with stock market investing. Undertaking research before investing gives me confidence that aiming for a million isn’t as hard as it might first appear!
