Private investors can realistically aim for a million in their retirement portfolio. Thousands have done just that in a Stocks and Shares ISA, which was only launched in 1999.
So it can be done in 25 years – well under the typical working lifetime – and probably faster than that with the ISA allowance now £20,000 a year. By generating the average annual FTSE 100 total return of 7% a year, it can be done in just over 21 years.
If I increased my annual return to 10% a year through individual stock picking, I’d get there in just 18 years. But how do I achieve that?
Today, I have a diversified portfolio of around 20 stocks, mostly culled from the FTSE 100. I also have a handful of exchange traded funds tracking the US S&P 500, US smaller companies and global technology stocks.
I’d like to beat the FTSE 100 index
But let’s leave the trackers out of it for now. They’re just ticking away, giving me exposure to global markets I don’t understand as well.
I worry 20 stocks is too many. Especially when I remember what billionaire investor Warren Buffett said about diversification. He called it “protection against ignorance”.
Buffett added: “It makes little sense if you know what you’re doing.” Ouch! Buffett’s spot on, of course. Compared to him, I’ve no idea. So should I educate myself and boil my 20 down to just 10 of my best ideas?
Even Buffett hasn’t gone that far. His Berkshire Hathaway vehicle holds more than 70 stocks. Although with $1.147trn under management rather than my pittance, it has no choice.
So I’m looking at my portfolio, wondering which ones to cull. Pharmaceutical stock GSK (LSE: GSK) leaps out. This is because it raises some difficult questions.
Could GSK shares help me make a million?
If I’d started with the aim of buying just 10 stocks, GSK would have been on the list. It’s a solid dividend growth stock with defensive capabilities. Healthcare stocks are thought to hold their own in a recession, as people still fall ill (possibly more so).
I bought GSK shares in March and June, thinking they looked great value. Personally, I’m down 19.52%. It’s the biggest disappointment in my portfolio. Over 12 months, the GSK share price is down 6.82%.
GSK was hit by a massive class action claim over its withdrawn cancer treatment Zantac. That was (largely) settled at the cost of £2.2bn in October, but the relief rally didn’t last long. Investors are now worried about President-elect Donald Trump’s plans for big pharma.
I can soothe myself by celebrating my winners instead. But if GSK was a 10th of my total wealth, I might do something panicky like sell and crystallise that loss.
Diversification gives me the confidence to wait for GSK to recover. So it has an important role to play. Buffett’s right, diversification is protection against ignorance. But until I know everything (ie never), I’ll keep spreading my risk.
I might thin down my 20 stocks but I doubt I’ll ever get it down to 10, or even 15. But I still expect to beat the FTSE 100 as a whole and turbo-charge my returns.
