I was reminded last week of one of the stock market’s odder quirks. It’s an oddity that perhaps can be taken advantage of to aim for a million pound portfolio without waiting four decades to get there.
In short, I read that the S&P 500’s biggest seven companies were up an average 50% year to date. The rest of the index? Up just 3%.
This strange dynamic, sometimes called the Pareto Principle, or the 80/20 rule, is where a handful of stocks are responsible for almost all of the financial rewards. A few big winners dominate a stock market’s performance. It happens time and again.
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It’s not limited to the US either. Ashtead is one British example. The equipment rental firm’s shares were 29p in 2008. Now, they’re £50. If I’d thrown five thousand into it then I’d now be a millionaire. Five thousand in a FTSE 100 tracker wouldn’t have even doubled.
These asymmetric payouts might be the key to a vast portfolio and massive passive income. What if I could follow a strategy that hunted the biggest returning stocks? I could aim for a £1m portfolio buying only a few shares.
“Get in early”
This, in a nutshell, is the philosophy of investor Peter Lynch. For the unaware, this is the man who coined the phrase “10-bagger” to refer to a stock that rises 10 times in value. He scours the market for the wealth-building power of these types of stocks.
How does he find them? Well, another of his suggestions is to “get in early”. What this means is to invest in a stock before its rapid growth phase. Once the company is so big that it’s a market leader, the really giant returns are over.
To go back to Ashtead, investing in 2008 could have swiftly made me a millionaire. Investing these days? Not so much. That’s not to say it’s a bad company, but it has a market value of £15bn. A 10-times return from now would see the firm somehow have the same value as oil giant Shell.
Turn £50k into £1m?
So what if I can use Lynch’s advice to find the best market-beating shares? Well, if we say the market yearly average is 10%, maybe I could aim for 12%, 13%, or even 14%. That might not sound like a huge upgrade, but even small improvements make a huge difference once compound interest takes effect. Here’s what £50,000 might turn into.
| £50,000 | |||
| 12% | 13% | 14% | |
| 5 years | £168,458 | £174,416 | £180,561 |
| 10 years | £377,222 | £403,644 | £431,946 |
| 15 years | £745,136 | £825,984 | £915,966 |
| 20 years | £1,393,525 | £1,604,116 | £1,847,905 |
Now, I will say this strategy is riskier than others. In my quest for 10-baggers, I could end up underperforming the market just as much as I could end up outperforming. If I was unable to find a single one of these special shares then I might end up seriously slowing my wealth gain. I could even end up losing money.
It’s a high reward and high risk strategy. I accept a higher chance of losing money to potentially reap the rewards, but it’s definitely not for everyone.
Still, if I’m looking to turn £50k into £1m then I may need to take a few chances. And if I get it right, I could withdraw a steady 4% to take home £40,000 per year as a second income. Sounds good to me.
