I’m aiming to invest my way to a million with stocks and shares. It’s an ambitious target because I didn’t start with £997,000!
However, I’m hoping the power of compounding will enable me to turn an initial sum measured in thousands into the magic million over time. And to help me, I’ve got a secret weapon — read on for more about that.
How urgency can work against investors
But, of course, nothing is certain or guaranteed. Part of the deal with all stocks and shares is they come with risks as well as opportunities. Behind every stock is a real business. And any number of operational challenges could arrive to derail my efforts to compound the value of my investments.
On top of that, studies have shown that most private investors and fund managers fail to outperform the general market indices, such as the FTSE 100. And many, sadly, end up with a long-term portfolio performance that falls short of the overall stock market. Some even lose money rather than build wealth.
But I think it’s helpful to try to understand why so many investors underperform. And perhaps one of the factors is some people often try to get rich too quickly from stocks and shares.
A raging urgency often leads to poor decisions. For example, I’ve heard of investors putting their entire portfolios into just one or two stock names. And whereas such concentration has the potential to build wealth fast, it also increases the risks. So if one underlying business gets in trouble, or suffers a setback, it’s possible the ensuing stock slump could wipe out wealth, or reduce it to peanuts.
Another problem driven by a sense of urgency can be over-trading. Sometimes investors jump in and out of stocks hoping for quick gains. It can be a time-consuming and expensive to approach investing like that. It’s possible to generate lots of trading costs and end up in short-term losers as well as winners. And, overall, the results could be disappointing.
Yet another misstep can be picking ultra-speculative stocks. Sometimes, profitless, all-or-nothing businesses can shoot to the moon. But it’s more likely that most will not and many end up taking an investor’s wealth away rather than adding to it.
A proven strategy
However, my secret weapon could be the potential solution for most of those problems. And the weapon is to use a different approach in my quest for a million from stocks and shares.
My plan involves targeting the shares of high-quality businesses, holding them for the long term and allowing the underlying operational progress of each company to drive compounding in my portfolio. I’m also diversifying between several stocks.
Such an approach has served other investors well before me. For example, Warren Buffett and, in the UK, Lord John Lee. Both have used the approach as their own secret weapons to make millions from stocks and shares. And Lee fleshed out the details of his strategy in his book How to Make a Million — Slowly.
Even with my secret weapon and Lord Lee’s book, a positive investment outcome could remain elusive for me. Nevertheless, I’m using the approach to invest in my quest for million in 2022 and beyond.