Every wondered why the rich are getting richer?
Below I'll show you…
But first consider this…
In March this year AMP Capital showed that if you invested $1 in the Australian sharemarket way back in January 1900, reinvesting the profits along the way, you'd have approximately $395,500 today.
But that'd make you at least 114 years old, right?
However if we shorten the timeframe a little, the returns show a similar trend.
According to investment firm Vanguard, Australian shares returned an average of 11.7% per year in the 30 years to June 30 2014. That turns $10,000 invested into $276,436. By comparison bonds returned 9.7% per year, listed property 9.2% per year and cash 7.8% per year.
However in today's low interest rate environment, investors will be lucky to get 4% on cash. Meanwhile 10-year Australian government bonds are yielding just 2.84%.
To put that in context, at 2.84% per year it'd take you 164.4 years to turn $10,000 into $1,000,000. That's excluding tax and inflation, of course.
Here's how you can make your first million
Few people will get rich investing their money at 2.84% per year.
Luckily if you can achieve a 10% per year return on $10,000 and invest an extra $200 per month, it'll take just 36 years to make a million dollars.
Source: MoneySmart. Click to enlarge.
But I know what you're thinking, "How can I make 10% in the sharemarket?"
There are two ways:
1 – As noted above, you can invest in a low-cost index fund which simply tracks the market; or,
2 – Invest in shares directly.
Companies to get you there
When we consider the historical returns and dividend yields of shares in companies like Westpac Banking Corp (ASX: WBC), Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS), the 10% annual return required doesn't seem so bad.
Of course there's a risk of capital loss.
However by tuning out of the 'noise' and remaining focused on investing in great companies for the long term, everyday investors can dramatically improve their chances of reaching their financial goals.
The secret to making your first million on the ASX
The reason the rich get richer can be put down to their ability to make their money work for them over the long term.
However by taking advantage of the returns on offer from the Australian share market and letting compound interest do its work, it's possible for every Australian to retire wealthier.
