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How big a stock market portfolio does someone need if they seriously want to try to make a million dollars? There is more than one school of thought on this topic.
Some people – perhaps through hope rather than experience – have the idea that if they invest a small amount in each of 50 or 100 stocks or even more, they might get lucky.
The idea of coming in early the next day Nvidia or filtronic It can get people’s minds (and calculators) racing when it comes to building significant wealth. But I think a different approach could provide a lower chance of success.
Investing, not gambling
Of course, if I had bought Nvidia shares earlier in their journey, I doubt I would be complaining now!
But I’m an investor, not a gambler. In my opinion, putting money into dozens or even hundreds of different stocks and hoping that one or two of them will be a big hit looks like gambling.
After all, with such a huge portfolio, how could I hope to learn the ins and outs of individual companies and evaluate their prospects?
While one or two stocks can do well – perhaps even spectacularly – there will likely be a fair number of misses in this approach of trying to cover the waterfront.
Zoom in on stocks with great prospects
That’s why I think the smart way for anyone to aim for a million is to do less, not more.
This can be explained very simply. Over the past five years, FTSE 100 index The leading British stock index rose by 43%. But someone who bought only the top 20 performers would have recorded a stronger performance.
Only the person who bought the first five would have done until better.
Set realistic goals
Of course, it is important to be a realistic investor and not a daydreamer. Even with a fantastic return, a millionaire has a much faster chance of success if they start with £200,000, for example, than if they start with £1,000. I say “Start with“, but this may be money that they are drip feeding over time.
But there is another big challenge here. Looking back over the past five years with the benefit of hindsight, anyone can see what stocks have done brilliantly.
But if we look to the future – as we should as investors – deciding which stocks look most promising is a matter of informed judgment, not fact.
Find the right indicators
I’m hanging on my own Bunzl (LSE: BNZL) Because I hope it can do very well in the next five years, while the Bunzl share price gain in the past five of 2% has been lagging far behind the FTSE 100.
There will be challenges. Inflation affecting profit margins is one such reason, due to Bonzel’s complex global supply chain and the role of petrochemicals in the production of some disposable food items such as cutlery. High oil prices could hurt.
But the company has honed its business model over the decades (and has increased its earnings per share every year for decades, too).
It taps into a large customer base with regular needs for items ranging from toilet rolls to food trays. It has significant economies of scale and aims to continue growing.
