I like the idea of becoming a stock market millionaire. But my approach to aim for a million is focussed on keeping things simple rather than complicated.
So I am not trying to hunt down some tiny company few people have heard of hoping it turns out to be the next big thing.
Instead, I am building a portfolio based around well-known blue-chip shares – and not that many of them!
Getting serious about investment
Before digging into the details of such an approach, though, it is worth mentioning that trying to aim for a million needs commitment, both in terms of time and money. This is not some scheme whereby I miraculously hope to turn just a few quid into a seven-figure sum.
Rather, I methodically invest over the long term, continuing to put more money in and letting the money I have already invested get to work.
The amount depends on one’s own financial circumstances, but here I foresee putting £1k per month (£12k each year) into my Stocks and Shares ISA.
Hitting the million
Doing that and compounding my ISA value at 10% annually means I could realistically aim for a million after 24 years. As a long-term investor, I am comfortable with that.
But what if I managed a compound annual growth rate of 20%, not 10%?
Then, still making the same monthly contribution of £1,000, I ought to hit my target in just 16 years.
Zooming in on quality shares at good value prices
Both 10% and 20% are quite tough targets to achieve over the long run, when taking the bad years with the smooth ones.
Still, I think they are possible. How could I aim for 20% not 10%?
I aim to invest in some of the same shares, just a smaller selection of them. Concentrating on a few great shares means spreading my portfolio less thinly (though still keeping diversified), meaning the strong performance of some shares would have greater overall impact on my returns.
Putting the theory into practice now
That sounds simple enough.
The devil in the detail, though, is trying to spot such high performers.
As an example, let me discuss one share that has achieved that target over the past five years. During that period, Games Workshop (LSE: GAW) has increased by 146% in value. On top of that, it is a regular dividend payer.
How might I have known five years ago that the company had brilliant potential? At that stage, it already had a proven business model and strong track record: even well-established companies can produce strong performance. It had a large target market of customers wiling to spend substantial sums on gaming paraphernalia.
Crucially, Games Workshop had a competitive advantage. Its proprietary fantasy universes and characters helped build customer loyalty, giving it pricing power.
The company faces risks such as a weak economy, which might make gamers less keen to keep buying new characters. That could hurt profits.
At the current share price, the valuation is too rich for me and I have no plans to buy the share now. But it does offer lessons about the sort of characteristics I am looking for when choosing shares as I aim for a million.
This post was originally published on Motley Fool
