The prospect of becoming a stock market millionaire may sound like a pipe dream. In fact, I think it is realistic to aim for a million. My chance of success will significantly depend upon a few variables.
Below are some of those variables. By making the right choices, I think I could have a realistic chance of turning my Stocks and Shares ISA into a seven-figure fund.
Investing, fast and slow
If I put £45 each day into shares, there is almost zero chance of me becoming a stock market millionaire within a year. Within a decade I would say it is unlikely, but possible. Within 30 years, I see it as very doable.
The lesson? To aim for a million, I think investors need to be realistic about timeframes. Trying to rush things can lead to bad decisions. It also does not give the time often necessary for shares to grow in value over the long term.
As billionaire investor Warren Buffett’s business partner Charlie Munger has said, the big money is not in the buying or selling, it is in the waiting.
The power of compounding
Compounding means reinvesting gains rather than taking them out. Such gains could come in the form of the money I earn if selling a share for more than I paid for it. Dividends could also start to pile up.
If I compound my portfolio at 10% a year on average, putting £45 a day in should let me successfully aim for a million after 21 years.
Doing less, not more
But what if I could compound at 15% annually, instead of 10%? That may sound like a fairly small difference, although generating a 15% compound annual gain consistently is actually fairly difficult.
But remember, compounding means that, for example, dividends can themselves effectively start to earn dividends.
So that 15% compound annual growth rate would allow me to aim for a million after just 17 years.
If I had started doing that from scratch in 2006, I could already be a stock market millionaire!
To try and improve my average compound annual gain, my strategy would be simple.
Great, not good
I would not invest in shares I thought were merely good or ones I hoped might be great. I would stick only to ones I had a high level of confidence I think are great. At the right price, for example, I would happily snap up Alphabet or Apple for my portfolio.
That means doing less as an investor. The shares could disappoint, so I would still spread my choices. But I would keep my portfolio to under a dozen different shares.
By not spreading my money too thinly, I would be able to invest more in shares in which I had a high degree of confidence.
Risk management
That can mean not investing in shares I thought could be amazing but also seemed risky. Over the long term, making some brilliant choices might not get me the results I want if I also suffer because of high risks.
To aim for a million, I think a smart investor needs to consider how best to keep risks at an acceptable level, while looking for shares with amazing prospects.
