Is it possible to aim for a million in the stock market, using part of a common salary to invest on a regular basis?
I believe it is. My approach would focus very much on keeping things simple. I would stick to just five to 10 blue-chip shares.
Rather than trying to spot some little-known company I thought could become the next big thing, I would stay firmly inside the FTSE 100 and stick to companies I knew and reckoned I understood.
The benefit of long-term investing
To aim for a million seriously, I think an investor needs to be realistic about timeframes.
I see this as a long-term project stretching over decades. Very few people put a modest amount of money in the stock market and make a million within just a few years, after all.
Imagine I invest £1,000 each month into a Stocks and Shares ISA. After 25 years, that would already mean I had invested £300,000. I would be almost a third of the way towards my million pound target without even considering any investment returns.
But as my goal is to aim for a million, £300,000 would leave me far off where I wanted to be.
That is why, along the way, I would steadily drip-feed money into shares of what I saw as high-quality businesses. By buying at an attractive price, hopefully I could benefit from share price gains as well as dividends.
How compounding dividends could help me become a millionaire
In fact, dividends are an important part of my plan to aim for a million.
Rather than just withdrawing them from my ISA as cash, I would reinvest them. That is known as compounding.
Compounding can lead to significant financial results over the long term. If I invested £1,000 into my ISA each month and achieved a compound annual growth rate of 10%, I would already be a millionaire after 24 years.
Finding shares to buy that could help me aim for a million
But while a 10% compound annual growth rate might not sound that high, it could actually be quite challenging to achieve.
Take British American Tobacco as an example. I own the shares, partly because they yield 9%. But they have lost around a quarter of their value over the past five years.
So a 9% yield today would not even translate into a 9% compound annual growth rate over the past five years.
To aim for a million, as with any investing target, I aim to find shares in what I see as brilliant businesses that sell for less than I think they are worth.
So I consider how large a company’s market of potential customers is, what it has that can set it apart from competitors, and also how healthy its finances look.
I then consider its valuation. Is the company selling for markedly less than I think it is worth? If so, I would consider adding its shares to my portfolio.
Rather than looking for long shots, my approach to aim for a million would be to stick to the proven and familiar. To reduce my risk, I would diversify across a range of FTSE 100 shares. But I think 10 blue-chip shares would give me enough diversification.
