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If you wanted to aim for a million in the stock market, how would you go about it? Many people’s minds immediately turn to the idea of finding a needle in a haystack. They think if they can identify the next Nvidia at the right stage, they could strike gold.
I understand that thinking. Since it listed in 1999, Nvidia’s stock price has soared 577,050%. That means that somebody who invested just $200 back then and hold onto the shares would now own Nvidia stock worth over $1m. On top of that there have been dividends along the way.
The problem is though, spotting such success stories far in advance is exceptionally hard, if not impossible.
Even people who believed in Nvidia back in 1999 had no way of knowing just how well it would do. And for every share that does brilliantly, there are plenty that disappoint. 1999’s dotcom boom illustrates that.
So if an investor seriously wants to aim for a million, what realistic steps could they take?
Regular investing on the right scale
The first thing to think about is how much you can afford to invest. It is far harder to turn £200 into £1m than to turn £200k into £1m. The more you invest and/or the longer your timescale, the less impressive the portfolio’s performance needs to be to hit £1m.
As an example, a 35 year-old who starts investing £1k a month at an annual compound growth rate of 6% could successfully aim for a million by the time they are 66.
Spreading the risks – but not too much
Think again about the needle in a haystack approach. What might it mean in practice? A common approach can be to buy dozens and dozens of different shares, hoping that it increases the chance that ‘one of them will be the next Nvidia’.
Buying a wider variety of shares may increase the chance of finding a diamond in the rough (as well as exposing the portfolio to a real stinker) but it also spreads the money invested more thinly. So even if one share does perform very well, if there are 50 or 100 others in the portfolio, its overall impact would be limited.
Set against that though, is the need for some diversification. Still, buying the 5-10 best-performing FTSE 100 shares over a period would significantly outperform buying the best 50.
The challenge is that nobody knows ahead of time what 5-10 shares may do best. Still, some research can help narrow the search.
One FTSE 100 share to consider
One share from the index I think investors ought to consider in today’s market is consumer goods company Reckitt Benckiser (LSE: RKT). Many consumer goods companies have lately lost favour with investors. Reckitt’s 17% down over the past year.
But that makes it attractively valued, in my view. The dividend yield of 4.4% is also considerably richer than the FTSE 100’s average of 3.1%.
Cost inflation for ingredients could eat into profitability, as Reckitt may struggle to pass it onto cash-strapped shoppers in some markets. But with its portfolio of premium brands like Vanish, a global distribution footprint and proven business model, I believe Reckitt offers both growth and income potential.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
