Getting rich on the share market sounds more like a wonderful dream than a reality for most investors, but it doesn't have to be.
In fact, plenty of individuals have made a fortune by investing in shares, and you can too.
Contrary to popular belief, making money on the share market doesn't require an above-average IQ, nor does it require a huge initial deposit that the average Joe couldn't possibly come up with.
Instead, becoming wealthy on the share market requires just three things:
- Patience
- Conviction
- Small, but regular deposits
Firstly, if you're looking to get rich quick, then the share market probably isn't for you. Investing takes time and patience while investors are also required to stay invested through the good times, and the bad.
Indeed, the market experiences some serious gyrations, from time to time, and they can test even the most experienced investors. As tempting as it might be to sell out during these times, that's one of the quickest ways to becoming poor.
That brings me to the next point: conviction. If you're going to succeed at long-term investing, you need to be confident in the future of the companies you own (that's right, if you own shares you legally own a small part of the underlying business).
Confidence will also help you with the first point: staying put when things get tough.
Finally, some investors stay away from the share market based on the belief you'd need a huge initial deposit to make any meaningful returns.
Sure, the bigger the deposit the better, but investors can still succeed by investing small amounts on a regular basis.
Creating your Million Dollar Portfolio
Historically, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) – which is considered the benchmark index for the ASX – has returned 11.9% per annum. That's going back to 1900 all the way through to 2014, according to calculations from AMP's Dr Shane Oliver, where 114 years of data should provide a reliable estimate for average future returns.
For the sake of remaining conservative however, let's say you can achieve 9% annual returns by investing in Australian shares.
By starting off with $10,000 and then saving just $110 per week to invest in shares, your portfolio could be worth just shy of $117,000 after 10 years. The returns get greater and greater as the power of compounding kicks in with the portfolio eventually hitting $1 million after 30 years – or $1.02 million, to be precise.
As I highlighted above, this process takes both time and discipline but the rewards can be truly incredible.
Picking the right shares
Unfortunately, making money in the share market isn't as straight forward as throwing money at any old company.
Traditionally, investors would immediately go for well-known companies like Commonwealth Bank of Australia (ASX: CBA) or BHP Billiton Limited (ASX: BHP). But based on the headwinds facing the banking and resources industries, that strategy could actually deliver lacklustre returns over the coming years.
Picking companies that will generate sound returns for your portfolio isn't easy, per se, but it's not impossible either.
Rather than focusing solely on blue chip shares, investors need to look for companies that boast strong long-term earnings potential. Those which are trading at reasonable prices and, ideally, offer sustainable (and growing) dividend yields.
Here are four companies you could consider adding to your portfolio today…
- Collection House Limited (ASX: CLH) is a debt collection business with a strong track record for earnings and dividend growth. The shares have been sold off heavily recently however, offering long-term investors a great opportunity to buy. Better yet, they offer a forecast 5.3% fully franked yield at their current price.
- Burson Group Ltd (ASX: BAP) operates in the automotive aftermarket parts industry, providing mechanics with the parts to service and repair vehicles (typically those that are four years or older). It enjoys a strong position in the Australian market and should continue to improve its margins as it increases its store count.
- oOh!Media Ltd (ASX: OML) is the leader in Australia's out-of-home advertising space and should enjoy strong growth as it shifts its focus away from static billboards and signs towards digital screens. It's not without its risks, but it could still be a great buy today.
- Wesfarmers Ltd (ASX: WES) is the only blue chip share on this list, but it could be an excellent pick-up at today's price. It houses a number of iconic brands such as Coles, Officeworks and Bunnings and offers a solid 5.1% fully franked dividend yield.
Investing in the share market can be (is) volatile, but can also be extremely rewarding in the long run. With the ASX 200 still hovering well below its recent high levels, now could be a great time to get started.
