One of the most common goals among investors in FTSE shares is the pursuit of becoming a millionaire. After all, who doesn’t want to join the top 1% and live a life of luxury? But while many see this as a pipe dream, those with financial discipline and who are focused on the future are already well on their way to achieving this goal. Here’s how.
Compounding to £1m
When it comes to the stock market, investors need money to make money. But contrary to popular believe, even someone from a modest background can still grow a life-changing fortune over time. Not by pursuing lottery-like penny stocks, but by being consistent and doubling down on the highest quality businesses.
FTSE shares have historically generated an average annualised return of 8% every year, including dividends. Investing £500 each and every month at this rate of return will build £1m in around 34 years. And those who started during the pandemic are already 15% of the way through their wealth-building journey.
However, that’s just when investors rely on index funds. Those willing to take on more risk and explore the realms of stock picking could drastically shorten their journey towards a seven-figure fortune.
Stock-picking potential
Stock picking’s a tricky task. Identifying high-quality enterprises that can maintain and expand their market share over the long run is difficult enough. Throw in the added complexities of corporate valuation and the emotional rollercoaster of stock market volatility, and the task only becomes harder. And yet those who put in the work and due diligence can achieve some pretty phenomenal returns.
Over the last 15 years, FTSE shares like Avon Technologies (LSE:AVON) and Morgan Sindall Group have demonstrated the power of stock picking, delivering 1,730% and 750% gains respectively. That’s an average annualised return of up to 21% – enough to make a £1m portfolio with £500 a month in just 17 years.
Yet this journey of explosive gains hasn’t been a smooth ride. Zooming in on Avon, the military protective equipment manufacturer has seen its stock rise and fall aggressively since 2010. Failures in military testing combined with supply chain disruptions compromised key customer contracts, resulting in several profit warnings that triggered a massive sell-off in 2021.
However, since then, investor confidence has started to rebound as mistakes of the past were corrected, and demand for its protective equipment bounced back. Subsequently, margin expansion’s now progressing ahead of schedule while revenue growth’s accelerating – a trend that’s started pushing the FTSE share back in the right direction.
Taking a step back
What defines a company’s quality is less about how they perform during the good times but rather how they do in the bad. Avon suffered heavily from its mistakes. But by keeping the balance sheet in a robust shape and not growing complacent, management’s seemingly steering the ship back on course.
As with every investment, there are still risks to consider. For example, the company’s ramping up production for one of its US Department of Defence contracts. But should this process encounter any delays or quality control issues, the group’s recovery momentum could be adversely impacted.
Nevertheless, even with external threats and challenges to overcome, Avon appears to show a lot of promise for long-term investors. That’s why I think it’s worth a closer look.
