What is the best way to aim for a million in the stock market? Some people may think it is by investing in hundreds of different shares and hoping that one of them is the next Nvidia (NASDAQ: NVDA) or Tesla.
But if a share is just a tiny fraction of an investor’s overall holdings, the impact it can have on total performance is limited.
Another way to aim for a million would be to start with a large sum of money in the first place. But that is not a luxury we all have. Fortunately, even starting from zero, I think it is possible to aim for a million through making regular contributions into a Stocks and Shares ISA or share-dealing account and investing in the right businesses.
Rather than putting my money into dozens of different shares and hoping one or two did exceptionally well though, I would buy into under a dozen different companies.
Laser focus on quality
Let me explain why. Imagine you had to invest in a pool of 100 companies. You could invest in all of them, you could invest in the top half performing ones, or you could invest in the top 10. What would you do?
Put like that, the most lucrative move seems obvious.
The numbers prove the approach
Imagine that I could invest £900 a month in 100 shares with an average compound annual growth rate of 5%. Or I could invest the same amount in just 25 of those shares with an average compound annual growth rate of 10%. Or I could invest the same amount in just 10 shares, with an average compound annual growth rate of 15%.
All three approaches could lead me to a portfolio worth a million pounds – sooner or later.
But the fastest approach, of course, would be by focusing on the 15% growth rate (whether that came from share price increase, dividends, or a combination of both). That would let me achieve my goal of aiming for a million, which I ought to achieve after 19 years.
The hunt’s on…
So far, so good. The challenge though, is finding the sort of shares that could achieve such a growth rate.
Looking at Nvidia as an example, consider its performance over the past five years. During that period, the chipmaker’s share price has grown 2,751%, blasting past my target. What would I have looked for five years ago that might have made me consider the share as a possible star performer?
Well, for one thing, there was the fact that it operated in a large market that was set to grow. Artificial intelligence (AI) was less of a buzzword than now, but it was already on many investors’ radar. Nvidia’s unique technology helped set it apart from rivals, then as now.
I still think Nvidia is an attractive business. Yes, it faces risks such as increased competition from other chip companies as the AI market has exploded. But its strengths remain notable.
Notable too though, is its valuation. I would not buy Nvidia for my portfolio at the current share price. But I would apply those same principles when hunting for quality shares as I aim for a million!
This post was originally published on Motley Fool
