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Many people like the idea of becoming a millionaire – and the stock market is a common place to try to make the dream come true. It may seem like the way to reach a millionaire is to invest in a lot of unknown companies and hope that one of them will be very successful.
For example, Nvidia increased by 2,635% in the last five years.
Five years ago, I already knew the chip maker's growth story. If I had invested less than £40,000 in its shares at that time, I would now be a millionaire thanks to my Nvidia holdings alone.
There are a few problems with such an approach though (not least that it relies on the benefit of hindsight).
Putting all my money in one share, no matter how attractive it may seem, goes against the basic principle of managing diversification risk. Second, many small companies end up going nowhere by looking for investment – even if they have a smart business.
Double duplication with proven quality
That doesn't mean I can't aim for a million anymore. Far from it. But I'm not going to try to do that by taking the approach of breaking up happy little businesses. Instead, I would focus on proven, large businesses. That doesn't mean I'm limited to FTSE 100but I would be happy to adopt a strategy focused on FTSE 100 stocks.
I can do less and not more. Rather than buying a bunch of FTSE 100 shares, I'd stick to a dozen – or less.
Why? Think about it like this. Investing in 10% or more of the FTSE 100 shares would mean that my overall performance was much better than if I bought a wider selection.
Say I invested £800 a month in shares that had a compound annual growth rate (CAGR) of 5%. I will be a millionaire in 38 years. If I take the same strategy and achieve an average CAGR of 10%, I would aim for a million in 26 years. For 15%, just twenty years will be enough.
Hunting for quality
But how could I get such shares? As an example, consider the FTSE 100 recruitment specialist Ashtead (LSE: AHT). Its share price has risen 158% over the past five years and its total return has also been boosted by dividends on top of that (although the current yield is only 1.4%).
Five years ago, it was clear that Ashtead was a good business. It has identified a profitable area with long-term demand from customers who often have deep pockets and limited supplier choice. It has provided many competitive advantages, from network scale to international reach that enables it to serve a single client in multiple markets.
That dynamic remains true today, in my opinion. But with a price-to-earnings ratio of 21, the value is too rich for my taste. After all, returns are not only based on how good (or bad) a business is, but the price it is bought for. Ashtead could face a more difficult climate, for example, if US construction activity slows and rental demand declines.
However, its performance shows that it is the type of share that I want as I aim to get a million it can be they are on the FTSE 100!
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