Image source: The Motley Fool
The idea of becoming a millionaire has a certain appeal for many people. Some invest in the stock market in the hope that by buying dozens of different stocks, they could strike gold by finding a small company that turns out to be next. tesla either Amazon. My own approach to aiming for a million would be different. I would gladly try to achieve that goal by buying just five to ten different stocks.
This is why.
Focus on brilliant quality
If I were a manager of a sports team and I could choose a bench of 50 decent players or the best five or ten in the country, I know what I would choose.
In my opinion, the same thing happens with stocks.
Warren Buffett’s investment approach
Instead of diluting my results by trying to cover the coastline, I would take Warren Buffett’s approach to focus on what look like great stocks.
Buffett has said that many investors would improve their investment returns by imagining that they had a punch card with 20 spaces and had to use one for every investment choice they made throughout their lives.
The key point, in my opinion, is that if we thought we had fewer options, we would focus more on the quality of our decisions.
From an investor’s perspective, that can make a big difference.
A portfolio full of stocks that are performing well can, over time, vastly outperform one focused on stocks that are simply performing quite well. So to aim for a million, I’d be happy to buy less than a dozen different stocks.
Find stocks to buy
But while this may sound good in theory, what does it mean in practice?
Making fewer investments means taking time and effort to find the few opportunities that look really great and could potentially move the needle as I aim for a million.
For example, I may find a stock I like but feel some concerns about risks I don’t understand, or nervousness because it’s not very attractively valued.
Instead of getting carried away with emotion, I try to pay attention to those red flags and therefore may decide not to invest on that basis.
Become a stock market millionaire
But finding brilliant stocks to buy is only part of the equation. Without spending the right amount of money to buy them, how can you practically aim for a million?
So if I wanted to try to fulfill that ambition, I would also get into the habit of regularly saving for investing.
As an example, let’s imagine that I could achieve an average compound annual growth rate of 15% in my portfolio (a figure that Buffett has regularly achieved but is certainly a challenge for many investors).
By investing £1,000 each month into my stocks and Shares ISA and achieving that kind of result, I could have a million-pound portfolio in less than a couple of decades from now. Of course, maybe not, since the return on investment is not guaranteed. But I think I have a chance.
