£1m might sound like an ambitious target, but I think many people can reach this goal. One way involves investing in the best FTSE 100 shares. There are some caveats and needs to be an awareness of the time it might take, but let’s consider what would be required.
First, I’d need a long enough time frame. I won’t reach a million in days, or even years. The time it takes will depend on how much I invest and which FTSE 100 shares I choose.
FTSE 100 returns
The average stock market return is said to be around 8%-10%. As this is an average figure, it includes some years where the Footsie returned over 20% a year, and even some negative years.
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As I’m only investing the modest sum of £400 a month to reach a significantly large goal, I’d aim for an above-average annual return.
Based on my investment, I calculate that I’d need to earn 11% a year to reach £1m in 30 years.
It’s encouraging to learn that over the past decade, one-third of FTSE 100 shares managed to achieve this. Some even managed to grow by over 20% a year. But how can I find these winners for the coming years?
Quality features
I’d focus on quality shares with growing earnings. There are specific characteristics that I’d look for. Let’s consider each one.
First, what makes a quality share can be subjective. But one metric that can quantify this approach is the return on capital employed of the business.
Popular quality-share investor Terry Smith often highlights this figure, and commonly targets over 15% for his investments.
Next, I’d look for companies that have a durable competitive advantage versus their peers. Warren Buffett famously refers to this as a moat. It can often be in the form of strong brands, superior technology, or patents.
Companies that have some form of moat also tend to achieve superior profit margins.
Lastly, I’d look for robust balance sheets indicating businesses that operate with manageable levels of debt.
Top Footsie shares
So which FTSE 100 shares meet my criteria? Right now, I’d buy Ashtead, JD Sports Fashion, Diageo, Spirax-Sarco Engineering, and Experian.
On average, this selection offers a return on capital employed of 19%, and an operating profit margin of 24%.
In addition, over the past decade these five shares managed to grow by a whopping 21% a year including dividends.
No guarantees
Bear in mind that there are no guarantees that this stellar performance will be replicated over the coming decade.
That said, I’d much rather put my money in these quality companies than high-risk penny stocks.
Another reason for this choice of FTSE 100 shares is that they all operate in different industries. That provides me with diversification benefits and avoids putting all my eggs in one basket.
Finally, by picking individual shares I’d need to keep an eye on them. Over time, things can change. For instance, new competitors or technologies can disrupt business models.
But by making these efforts, I’d put this £1m in my sights.
