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I was reminded last week of one of the stock market’s odder quirks. It’s an oddity that perhaps can be taken advantage of to aim for a million pound portfolio without waiting four decades to get there.
In short, I read that the S&P 500’s biggest seven companies were up an average 50% year to date. The rest of the index? Up just 3%.
This strange dynamic, sometimes called the Pareto Principle, or the 80/20 rule, is where a handful of stocks are responsible for almost all of the financial rewards. A few big winners dominate a stock market’s performance. It happens time and again.
It’s not limited to the US either. Ashtead is one British example. The equipment rental firm’s shares were 29p in 2008. Now, they’re £50. If I’d thrown five thousand into it then I’d now be a millionaire. Five thousand in a FTSE 100 tracker wouldn’t have even doubled.
These asymmetric payouts might be the key to a vast portfolio and massive passive income. What if I could follow a strategy that hunted the biggest returning stocks? I could aim for a £1m portfolio buying only a few shares.
“Get in early”
This, in a nutshell, is the philosophy of investor Peter Lynch. For the unaware, this is the man who coined the phrase “10-bagger” to refer to a stock that rises 10 times in value. He scours the market for the wealth-building power of these types of stocks.
How does he find them? Well, another of his suggestions is to “get in early”. What this means is to invest in a stock before its rapid growth phase. Once the company is so big that it’s a market leader, the really giant returns are over.
To go back to Ashtead, investing in 2008 could have swiftly made me a millionaire. Investing these days? Not so much. That’s not to say it’s a bad company, but it has a market value of £15bn. A 10-times return from now would see the firm somehow have the same value as oil giant Shell.
Turn £50k into £1m?
So what if I can use Lynch’s advice to find the best market-beating shares? Well, if we say the market yearly average is 10%, maybe I could aim for 12%, 13%, or even 14%. That might not sound like a huge upgrade, but even small improvements make a huge difference once compound interest takes effect. Here’s what £50,000 might turn into.
| £50,000 | |||
| 12% | 13% | 14% | |
| 5 years | £168,458 | £174,416 | £180,561 |
| 10 years | £377,222 | £403,644 | £431,946 |
| 15 years | £745,136 | £825,984 | £915,966 |
| 20 years | £1,393,525 | £1,604,116 | £1,847,905 |
Now, I will say this strategy is riskier than others. In my quest for 10-baggers, I could end up underperforming the market just as much as I could end up outperforming. If I was unable to find a single one of these special shares then I might end up seriously slowing my wealth gain. I could even end up losing money.
It’s a high reward and high risk strategy. I accept a higher chance of losing money to potentially reap the rewards, but it’s definitely not for everyone.
Still, if I’m looking to turn £50k into £1m then I may need to take a few chances. And if I get it right, I could withdraw a steady 4% to take home £40,000 per year as a second income. Sounds good to me.
