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Many people like the idea of becoming a millionaire, and the stock market is a common place to try to make the dream come true. It may seem like the way to aim for a million is to invest in dozens of little-known companies and hope that one of them achieves great success.
For example, NVIDIA It has skyrocketed 2,635% in the last five years.
Five years ago I already knew the chipmaker's growth story. If I had invested less than £40,000 in its shares at the time, I would now be a millionaire thanks to my stake in Nvidia alone.
However, this approach raises several problems (and not just that it is based on the benefit of hindsight).
Putting all my money in one stock, no matter how attractive it may seem, goes against the basic diversification principle of risk management. Second, many small businesses end up getting nowhere from an investment standpoint, even if they have the makings of a brilliant business.
Double proven quality
That doesn't mean you can't still aim for a million. Nothing of the sort. But I wouldn't try to do it by taking a scattershot approach to attracting small businesses. Instead, I would focus on large, proven companies. That doesn't necessarily limit me to the FTSE 100but I would be happy to adopt a strategy that focused on FTSE 100 stocks.
I would also do less, not more. Instead of buying dozens of FTSE 100 shares, I'd stick with a dozen, or even fewer.
Because? Think about it like this. Investing in the top 10% of FTSE 100 stocks would mean my overall performance would be much better than if I bought a broader selection.
Let's say I invested £800 a month in stocks that had an average compound annual growth rate (CAGR) of 5%. I would be a millionaire in 38 years. If you adopted the same strategy and achieved an average CAGR of 10%, you could aim for a million in 26 years. With 15%, only two decades would be enough.
On the hunt for quality
But how could you find those stocks? As an example, consider FTSE 100 rental specialist Ashtead (LSE: AHT). Its share price is up 158% over the past five years, and the total return has also been boosted by dividends (although the current yield is just 1.4%).
Five years ago, it was already clear that Ashtead was a good business. He had identified a profitable niche with long-term demand from customers who often had deep pockets and limited supplier options. It offered multiple competitive advantages, from network scale to multinational reach, allowing it to serve a customer in multiple markets.
In my opinion, those strengths are still valid today. But with a P/E ratio of 21, the valuation is too high for my taste. After all, returns are based not only on how good (or bad) a business is, but also on the price at which it is purchased. Ashtead could face more adverse weather conditions, for example, if construction activity in the United States slows and demand for equipment rental falls.
Still, its performance illustrates that the kind of action I'm looking for as I aim for a million can They exist in the FTSE 100!
