The Australian share market has made countless millionaires over the years.
The good news is that there's nothing to stop you from becoming one of them in the future.
Here are five easy steps to take if you want to grow your wealth with ASX shares:
Image source; Getty Images
Step one: Start early
Time is one of your greatest assets when it comes to investing. The longer you are in the market, the more you can benefit from the power of compounding. In respect to compounding, legendary investor Warren Buffett once said: "My wealth has come from a combination of living in America, some lucky genes, and compound interest."
Step two: Make regular investments in ASX shares
The next step is to make regular investments. There are a few reasons for this. The first is that by investing regularly, you are able to reduce the impact of volatility on your purchases. This is because you will be purchasing more ASX shares when the price is low, and fewer shares when the price is high. In addition to this, investing in this manner lets you benefit fully from compounding. It also means that you don't miss out on new opportunities when they arise.
Step three: Focus on quality
It can be tempting to buy into small cap ASX shares that are being hyped up on message boards. The promise of getting rich quickly is very alluring. However, most of the time people will lose money on these investments when they turn out to be all hype and no substance. Instead, investors would be better off focusing on quality companies that have strong business models, sustainable competitive advantages, and solid growth prospects. These types of investments have been the key to Warren Buffett's success over multiple decades.
Step four: Take a long term perspective
As mentioned above, time is a great asset when investing. So, when you're picking ASX shares to buy, it is arguably best to imagine that you are buying with the intention of holding onto them for at least a decade. Buffett once quipped that his favourite holding period was "forever." In addition, by taking a long term approach, you can be patient with your investments. After all, it's important to remember that shares don't go up in a straight line. There are many ups and downs. But if you become impatient and jump out at the wrong time on a down period, you could sacrifice significant future gains.
Step five: Reinvest your dividends
The dividends paid by the likes of BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), and Telstra Corporation Ltd (ASX: TLS) are a great source of income. But if you don't need these funds immediately, then it is well worth reinvesting them back into the share market. By doing so, you allow the dividends to compound and grow into something larger in the future. So, when you do need them as income, you'll be receiving a lot more than if you had withdrawn them throughout your investment journey.
Combining all steps
If you combined all these steps and invested $1,000 per month from now onwards and generated an average 10% per annum return, you would grow your portfolio to be worth $1 million after 23 years.
Investing more each month or generating larger returns would get you there even sooner.
For example, $2,000 per month and an average return of 12% per annum would get you to $1 million in just over 15 years. Though, beating the market is no easy feat and far from guaranteed.
