A lot of people think shares are risky and dangerous. But shares have proven to be the best to reach long-term wealth, whilst also not being as dangerous to investors as other asset classes.
Holding lots of cash means you're at risk of being hurt by inflation over time. Investing in property means you likely have to take on large amounts of debt and have cash going out of the door due to negative gearing. Plus, there's a lot less hassle due to less paperwork and not having to deal with tenants.
The process with shares is very simple:
Step 1: Spend less than you earn
This is an obvious thought, but it's very important to conquer the first part. If you earn $60,000 after tax and spend $48,000 then you have $12,000 a year that you can invest. The only way to improve this is by earning more, spending less or a combination of both.
If you're able to get the best value for your money then you may find that you can make your earnings stretch further than an un-frugal person earning 50% more. That's how you get ahead.
Step 2: Invest the difference
The next thing to do is invest the savings. I wouldn't recommend investing the $12,000 in one big lump sum, instead you could invest a monthly $1,000 or a bi-monthly $2,000 into shares.
There are a lot of different shares you can invest in. So, for this article I'll keep it simple by saying you could choose Vanguard MSCI Index International Shares ETF (ASX: VGS) which gives exposure to the biggest shares across the world. If this index achieves long-term returns of around 8% to 12% then it will compound wealth very nicely.
Step 3: Be patient
The worst thing that investors do in regards to patience is buying shares at high prices and then selling them at low prices when they get scared. Just buying and holding for the long-term through the ups and downs should lead to pleasing long-term wealth.
This can be particularly difficult in a market crash if shares have dropped by 20% or more, but selling at that point would be the biggest destruction of wealth you could do.
Foolish takeaway
Doing the above three steps for a lifetime could lead to a very impressive portfolio and wealth. Investing $12,000 a year for a decade, without any mention of compounding, ends up being $120,000.
