Is it possible to invest a one-off lump sum of £20,000 in UK shares and grow it to £1m? That’s the question I’m asking myself today.
I’d say that the answer depends on two predominant factors. First is how much time I have before I want to access my investment pot. Time matters and a longer time frame should result in greater returns.
Referring to Berkshire Hathaway, CEO Warren Buffett famously once said: “Our favourite holding period is forever.” My own holding period isn’t forever, but it is around 20-30 years. This should be plenty of time for my shares to grow, particularly if I reinvest my dividends.
Aiming higher
Second, my £1m target relies on the total return of my shares. Total return includes both share price returns and dividends. On average, over the past 35 years, UK shares have returned around 10% per year. But more recently, over the past five years, the average is closer to 6% per year.
For my own portfolios, I aim for more than the average. I reckon with some careful stock selection it’s possible to achieve at least 15% per year. I do this by weeding out the weaker companies. I also focus on the businesses with better prospects in growing markets and economies.
By my calculations, investing £20,000 today at an average annual return of 15% could result in a £1m portfolio in 28 years. Note that at 10% per year, it could take 41 years and at the average 6% of recent years, it would take a lot longer. So to achieve my target within 30 years, I’d really need to try and beat the average return. But I’m well aware that I might not achieve this.
Picking the best UK shares
There are many styles of investing, including growth, value, and momentum. For many years I’ve focused on quality growth and momentum factors. I like finding shares that offer good-quality earnings, a strong balance sheet and above-average profit margins. Companies that demonstrate durable competitive advantages are my favourite.
One UK share that continues to tick my boxes is Games Workshop. This fantasy miniatures business is one of my best investments of recent years. It’s currently trading at nine times my original outlay from four years ago. That’s over 75% per year, so far. Picking a few really big winners like this can do wonders for my Stocks and Shares ISA and will hopefully speed up my journey to £1m.
Swings and roundabouts
A word of warning, however. Picking individual shares generally involves more volatility than, for instance, picking a diversified fund. Individual share prices tend to bounce around more. I’d need to be prepared for the swings that inevitably occur. Whether in a fund or shares, I’d need a lot of patience. It can often take time to see results. Also, not all selections will be winners. I’m prepared for some losses, but I’d need to try to manage my risk.
Overall, I reckon it’s possible for me to grow £20k into £1m by investing in UK shares, but I reckon I’d achieve my target a lot faster if I add some additional funds to my investment every year. But that’s a story for another day.