Even though inflation is reducing the spending power of a million pounds, for many people the idea of being a millionaire has the same appeal that it always has had. If I wanted to aim for a million, one way I would try and hit my target would be by investing in shares.
Be realistic about timelines to aim for a million
I think it is possible to become a millionaire by investing in shares. But slow and steady wins the race. While some shares outperform the market, the idea that I can buy a share today that will increase in price by five or ten times in just one or two years is far-fetched.
There are such shares but they are rare. Investing in risky shares just because they seem to dangle incredible returns could actually slow not speed up my progress.
Not only that, but to reduce my risk I would always hold a diversified portfolio of shares. So even if I did find one company that blew out the lights, the chances are that the average performance of my portfolio as a whole would be more modest.
Reinvest dividends
I could try to invest in shares I thought had long-term potential to grow their sizes significantly, like Apple and Google parent Alphabet.
But I would also invest in some shares I hoped would pay me high dividend yields. I would not invest in them purely because of their status as high-yield shares. Instead I would always focus first on finding companies I thought had strong long-term income generation prospects due to their business model. Only then would I look at their dividend yield.
If I found such a company and bought into it, I would reinvest the dividends rather than take them as cash. Consider insurer Direct Line as an example. I hold the shares in my Stocks and Shares ISA and they yield 11.6%.
Dividends are never guaranteed so that could change in future. But if I reinvest the dividends each year at today’s share price, after a decade I would have $2,997 worth of Direct Line shares, earning me almost £350 each year in dividends. Such dividend reinvestment is known as compounding and could help me aim for a million faster.
Think in decades
Still, even if I benefitted from some fast-growing companies and compounded high dividends, I ought to think in decades.
As an example, if I kept investing £1,000 each month and my portfolio gave me an average annual return of 10% that I reinvested, it would take me 24 years to become a millionaire on the back of this strategy.
So I might be able to hit my target — but I need to be patient. If I want to aim for a million, getting there in under a quarter of a century by investing £1,000 each month still sounds attractive to me.