Image source: Games Workshop plc
I like the idea of becoming a stock market millionaire. But my approach to aiming for a million focuses on keeping things simple rather than complicated.
So I'm not trying to hunt down a small company that few people have heard of in the hopes that it turns out to be the next big thing.
Instead, I'm building a portfolio based on well-known blue-chip stocks, and not that many!
Take investing seriously
However, before delving into the details of such an approach, it's worth mentioning that trying to reach one million requires commitment, both in terms of time and money. This is not a plan by which I hope to miraculously turn a few pounds into a seven-figure sum.
Rather, I invest methodically for the long term, continuing to put more money in and letting the money I've already invested go to work.
The amount depends on your own financial circumstances, but here I plan to put £1,000 a month (£12,000 each year) into my stocks and Shares ISA.
reach a million
Doing that and increasing my ISA value at 10% a year means I could realistically aim for a million after 24 years. As a long-term investor, I'm comfortable with that.
But what if you achieved a compound annual growth rate of 20%, not 10%?
So, if I continue making the same monthly contribution of £1,000, I should reach my target in just 16 years.
Getting closer to quality stocks at good prices
Both 10% and 20% are quite difficult goals to achieve in the long term, if you compare bad years with good ones.
Still, I think they are possible. How could I aim for 20% and not 10%?
My goal is to invest in some of the same stocks, just a smaller selection of them. Focusing on a few great stocks means spreading my portfolio thinner (although I still stay diversified), meaning that a few stocks performing well would have a bigger overall impact on my returns.
Putting theory into practice now
That sounds simple enough.
However, what's in the details is trying to spot those who are such high performers.
As an example, let me look at a stock that has achieved that goal over the past five years. During that period, Games workshop (LSE:GAW) is up 146% in value. On top of that, it regularly pays dividends.
How could you have known five years ago that the company had bright potential? At that stage, it already had a proven business model and a solid track record – even well-established companies can produce strong performance. It had a large target market of customers willing to spend substantial sums on gaming paraphernalia.
Fundamentally, Games Workshop had a competitive advantage. Its proprietary fantasy universes and characters helped build customer loyalty, giving it pricing power.
The company faces risks such as a weak economy, which could make players less interested in continuing to purchase new characters. That could hurt profits.
At the current share price, the valuation is too high for me and I have no plans to buy the stock now. But it does offer lessons on the type of characteristics I look for when picking stocks, since my goal is a million.
