I firmly believe that ASX shares are one of the best, if not the best, ways to create wealth.
There are many different asset classes that people consider investing in. Cash, bonds, property and shares of businesses. Most of these categories are broken down further into segments like residential property, commercial property, international shares, Australian shares, infrastructure and private equity.
Year to year any of these categories could perform better than the others. But when you start looking at the longer timeframes like five years, ten years or longer, it's usually shares that win the race.
Here are three reasons why I think ASX shares could be the best way to create wealth:
Able to start with small investments and diversify easily
I think over a lifetime it can make a big difference being able to invest with as little amounts such as $500 or $1,000. Compare that to buying an investment property. You have to save tens of thousands of dollars before you've saved enough for a deposit and then you need to take on hundreds of thousands of dollars of debt to make the purchase.
A person saving and investing in shares can start compounding much sooner in their lives. They can also create much stronger diversification – putting your entire investment wealth in a single property is not the wisest idea for risk mitigation.
Plus, it costs a lot in various fees to buy (and sell) property.
Strong compounding returns
There are plenty of businesses out there in the share market that earn over 20% on money that's kept and re-invested in the business rather than paying it all out as a dividend. REA Group Limited (ASX: REA) is a good example of the growth that can be created by continually re-investing.
Businesses can generate good compounding returns for shareholders by re-investing profit into the business for more growth. You can benefit from compounding even further by re-investing dividends into buying more shares. This can greatly add to the returns over the years.
Compounding is what turns a monthly $1,000 share investment into $1 million a couple of decades down the track.
It's much harder to re-invest rent back into a property. It's not like you can easily add extra rooms or land to the existing property.
Franking credits
My first two reasons why shares are better could be applied to all types of shares (like international shares), but franking credits are a very Australian affair.
Franking credits juice the returns of the dividends paid to us, increasing the returns we receive and improving our tax position.
They can make all the difference to retirees or people on low taxable incomes.
Foolish takeaway
One of the main things that people seem to have trouble with shares is the volatility. You could just park all of your wealth as cash, but that wouldn't do much. I think ASX shares are the best way to grow your wealth over the long-term as long as you stick with quality businesses or exchange-traded funds (ETFs).
