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The only reason to buy ASX shares

The S&P/ASX 200 (Index: ^AXJO)(ASX: XJO) should return 7% to 10% plus dividends each year over the ultra-long-term – on average.

Indeed, according to Vanguard, since 1970 the Australian sharemarket has returned 9.9% per year on average, including dividends.

A financial planner will assume growth of between 5% (conservative) and 10% (aggressive) when they model your investments in shares.

But have you ever asked why?

Risk

Academics say that shares — and property — are riskier than other assets like bonds and term deposits. Therefore, investors should demand a higher return.

But they’re wrong because they don’t understand risk.

Of course, throughout your lifetime, share prices will rise and fall — sometimes dramatically.

But that doesn’t make them riskier.

Ask yourself: If the price of your house goes down 20% next year does that make it a worse (i.e. riskier) investment or a better investment?

Same house, more potential.

That’s the way I see it.

So why are shares such a good investment?

Shares are such a good investment because they represent part ownership of a business.

Ask yourself: Who are the five richest people or families you know?

Chances are, a few them are — or were — business owners. Given how many people you know, it’s no coincidence.

It doesn’t matter if they are a tyre repair shop owner, own three laundromats or a bricklaying business. What’s important to note is that businesses make money.

And, typically, only the biggest businesses are listed on the stock exchange.

For example, last year, business-owners (read: shareholders) of Commonwealth Bank of Australia (ASX: CBA) enjoyed a return of 15%.

I’m not talking about share prices going up 15% – Commbank shares are up around 9% over the past year, plus dividends.

I’m talking about the return to the business. Australia’s largest bank achieved a return on equity (ROE) of 15% last year. Meaning, for every dollar of shareholders’ money invested in the company it returned 15 cents in a year.

Ask yourself: Would a bricklayer look back on the financial year which just ended and measure business success by looking at its share price (if it had one)?

No.

Instead: Would he or she look at the cash returns they made?

More likely.

Ultimately, share prices can be expected to increase over the long-term on average because you are buying part of a business.

But in the short-term, prices can swing wildly up-and-down. That’s your opportunity.

Foolish Takeaway

The message I’m trying to convey is simple: Buy. Good. Businesses. And hold them for the long-term.

If you buy the right businesses, I think you stand a good chance of matching or doing better than the historical average return of the sharemarket.  

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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