$1,000,000 portfolio: One way to achieve 7-figure wealth

One simple investing trick can help almost anyone build wealth on an exponential scale.

| More on:
A businessman in a suit adds a coin to a pink piggy bank sitting on his desk next to a pile of coins and a clock, indicating the power of compound interest over time.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Most readers probably wouldn't say no to owning a seven-figure investment portfolio. But getting to a $1,000,000 portfolio of ASX shares is no easy feat. It requires years of patience and discipline to be sure. However, the most important factor that will determine if one can get to a million-dollar portfolio is the harnessing of the power of compounding.

Compound interest was not called the eighth wonder of the world by Einstein for nothing. It refers to earning interest on already-earned interest, and is the only real way most of us can effectively and efficiently build wealth on the share market outside of getting lucky on a moonshot investment.

Even the legendary investor Warren Buffett almost entirely credits compounding as the reason why he is worth ~US$130 billion today. Buffett once said "My wealth has come from a combination of living in America, some lucky genes, and compound interest".

It also explains how his company Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) is worth US$876 billion right now.

It isn't too difficult to understand how the powers of compounding can exponentially grow your wealth over time.

Let's take a simple ASX index fund like the Vanguard Australian Shares Index ETF (ASX: VAS) to demonstrate. Since its ASX inception in 2009, this exchange-traded fund (ETF) has returned an average of 8.97% per annum (assuming dividends are reinvested).

Compounding: How to get to a $1,000,000 portfolio of ASX shares

Let's say this index fund returns that same rate over the next 40 years (which one should never bank on, as past returns are no guarantee of future success). If one invested just $500 a month into this fund at that rate of return and reinvested all dividend distributions, they would have $97,815 after ten years. Not bad.

But if they just kept at it for another ten years, that $97,815 would grow to $335,660. After another ten, they would have $916,970, which would hit $2.34 million if yet another ten years go by.

That's compounding in action—earning interest on interest on interest. The more time it has, the faster your wealth grows. So, using a simple ASX index fund generating a fairly standard return, you can see how this power of compounding, as well as patience and discipline, can get anyone to a seven-figure ASX share portfolio.

Of course, you can do a few things to juice up your returns as well.

It always helps to invest more. If you can stretch from investing $500 a month to $800, you'd end up with $3.74 million after those four decades instead of $2.34 million.

If you learn about active share market investing and manage to pick out a portfolio of individual shares that return a collective 12% per annum instead of 8.97%, you'd have almost $6 million in shares after those 40 years, rather than $2.34 million.

As such, you can see how this one simple concept of compound interest can work wonders for anyone's wealth and can even get you a $1,00,000 portfolio.

Motley Fool contributor Sebastian Bowen has positions in Berkshire Hathaway and Vanguard Australian Shares Index ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
How to invest

How much would I need in an ASX share portfolio to earn $500 a month?

Want a monthly income boost? Here's one way you could do it.

Read more »

A person holds their hands over three piggy banks, protecting and shielding their money and investments.
How to invest

I'm preparing for an ASX stock market crash in 2025

Whatever happens next year, my portfolio will be ready...

Read more »

Cheerful boyfriend showing mobile phone to girlfriend in dining room. They are spending leisure time together at home and planning their financial future.
How to invest

My ASX share portfolio is up 40% in 2024! Here's my strategy for 2025

Investing in quality companies paid off in 2024. Here's what I did.

Read more »

Young happy athletic woman listening to music on earphones while jogging in the park, symbolising passive income.
How to invest

Here's my $3 a day ASX passive income plan for 2025

ASX dividend stocks provide a unique path for building a passive income stream.

Read more »

A large transparent piggy bank contains many little pink piggy banks, indicating diversity in a share portfolio
How to invest

Is your ASX share portfolio too diversified?

Too much of a good thing can negatively impact your portfolio.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

Concerned about ASX shares at all-time highs? Don't worry, you've got options

Investing in other asset classes can help mitigate the share market's highs...

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

I would listen to Warren Buffett's advice and buy undervalued ASX shares today

It's never a bad idea to follow in the footsteps of the Oracle of Omaha.

Read more »

A young couple hug each other and smile at the camera standing in front of their brand new luxury car
How to invest

How I would generate $50,000 of retirement income from ASX shares

Don't retire with less than you need. Here's how I would look for a $50,000 income in retirement.

Read more »