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Becoming a millionaire with UK shares is a relatively simple process. Investing consistently over the long term, such as major indices FTSE 100 Or FTSE 250 Could take an investor’s wealth firmly into seven-figure territory.
Even if an investor could raise only £500 a month at a 10% annual return, it would take almost three decades to reach a million. Of course, the biggest problem with this approach is waiting time.
Sitting for 28 years demands a lot of patience. And although there are limits to how quickly this can happen, building a concentrated portfolio of the best UK stocks can grow to £1 million very quickly. In fact, if an investor can achieve 15% annual returns, it is possible to wipe out about a decade from the waiting time.
Of course, this is easier said than done. And consistently reaching 15% is quite a herculean endeavor that usually ends in failure. Nevertheless, many have become successful and have amassed immense wealth in the process. With this in mind, what are the key strategies to reach this limit?
quality over quantity
Building a concentrated portfolio still calls for patience. While the returns can be high, finding companies capable of delivering such returns doesn’t happen overnight. In fact, it can take months or even years to reach the UK’s best and brightest stocks.
While stock screeners can help eliminate financially compromised ventures from consideration, they can only go so far. This is because financial health does not guarantee market-beating returns. After all, just because a company is the leader in the industry with the best profit margins today, doesn’t mean it will remain that way for the next decade or so.
This is where it is worthwhile to study the stock-selection strategies of the investors who have made such impressive gains over the years. For example, Warren Buffett is currently sitting on an average annual return since the 1960s of 19.2%!
So, what does Buffett look for?
It is necessary to be financially strong. But to stay that way, a company must have a unique competitive edge that it can sustain and grow over the long term. That way, the conglomerate can stay on top even when disruptive start-ups emerge.
Competitive advantage can come in many forms, from a powerful brand to difficult customer relationships. And the more advantages a company has that others can’t replicate, the more likely it is to steal market share, boost earnings and increase shareholder wealth.
expect the unexpected
Diversification provides adequate security to the enterprises against sudden disruptions. After all, the adverse effects of one company’s failure can be mitigated by others. In a concentrated portfolio, this protection does not exist. Therefore, investors should carefully examine the risks of each candidate stock, both internally and externally.
This is where a margin of safety enters the picture. Even if an investor discovers an amazing business, the risk profile may be prohibitive unless the stock is trading at a significant discount.
It’s rare to find the right combination of low risk, affordable price and great quality. And even the most thorough investigation can overlook a factor that becomes a bigger problem later. But with a disciplined think first, act later approach, it is possible to generate substantial returns that beat the market. And even if an investor falls short of the 15% target, that extra 2% can work wonders in building wealth faster.
The post I’ll be aiming for a £1 million portfolio with just a few UK stocks appeared first on The Motley Fool UK.
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The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023
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