Is it possible to achieve millionaire status by investing £500 a month in the stock market? Absolutely. But if I’m going to buy shares to target a seven-figure sum, it’ll take time and dedication, not to mention a sensible strategy.
So, here’s how I’d aim for a million owning just a few shares.
Growth stocks
First, I’d focus on companies with strong growth potential.
Carefully selected growth stocks can turbocharge my returns if they turn out to be big winners. For example, one US stock I like is Nvidia, a designer of graphics processing units for computing platforms.
Now, I’m not saying Nvidia is an emerging business. Far from it. It currently has a market cap of $592bn, and the share price increased rapidly during the pandemic.
That said, I see every reason it can reach a $1trn valuation over the coming years. The exclusive club of trillion-dollar stocks currently contains just four companies: Apple, Microsoft, Saudi Aramco, and Alphabet.
Admittedly, the price-to-earnings (P/E) ratio of 137.6 is a risk, especially if growth disappoints. However, Nvidia’s evolution into a company with impressive AI capabilities makes this stock a buy for me.
Cheap valuations
Looking closer to home, there are several undervalued companies in the FTSE 100 index that look appealing. Buying high-quality businesses at cheap prices is a great way to target a million.
Granted, it’s easier said than done, and there’s always a risk I could miscalculate a company’s true value. But that’s a risk I’m prepared to take in my quest for a seven-figure portfolio.
GSK is a good example of a stock that I think is cheap right now. The pharma business trades at a forward P/E ratio of just 10. It delivered encouraging revenues in 2022 and the outlook seems bright with 69 vaccines and speciality medicines in the pipeline.
An ongoing lawsuit regarding the alleged cancer risks of its discontinued Zantac medication for heartburn is a concern, but I think that’s more than compensated for by today’s bargain valuation.
Diversification
I’d aim for a million by concentrating my portfolio in just a few shares. If my stock picks prove successful, I could potentially outperform index funds as a result, but this carries significant downside risks too should my investments underperform.
Therefore, I think it’s important to diversify my positions to spread my risk. For instance, if I had spare cash, I’d also allocate some funds to small-cap stocks such as Argentex Group, which provides foreign exchange services to corporate clients and individuals.
Although there’s a higher volatility risk with small-cap investments, I think they deserve a modest place in my portfolio.
Compound returns
The FTSE 100 has historically returned between 6% to 8% over long periods. I’d aim for a higher return in the region of 10%.
There’s no guarantee I’d achieve this, of course, and my investments could underperform, which would delay my progress in reaching a million-pound portfolio, or even send it into reverse. Nonetheless, if my positions perform well, it’s an ambitious but not unachievable goal.
If I secured a double-digit return and invested £500 each month in shares, I’d be a stock market millionaire in a little under 29 years. It’s time to put my plan into action!
