One of the best things you can do for your wealth is to invest in shares. It has been proven decade after decade that shares are the best wealth creator over the long-term.
Most of the asset class comparisons don’t include the cash loss effect of negative gearing or the positive franking credits effect to returns. I think it’s an unfair comparison.
But, simply ‘investing in shares’ is as broad a suggestion as ‘get a job’. What job? How long should you stay there? It’s not very helpful, but it’s a start.
Step 1: Save some money
You can’t invest without any money. Whether you earn $40,000 or $400,000 a year you need to save some of it to start investing.
Even if you only save $100 a month to invest, that is still a great effort and you’ll be a lot better off than you would have been otherwise.
Step 2: Invest in ‘good’ shares
‘Good’ doesn’t mean the latest hot tip that your uncle gave you at the family barbecue.
Legendary investor Warren Buffet advocates to invest in a simple index fund called the S&P 500, a group of 500 of the biggest global businesses listed on American stock exchanges. We can access that on the ASX with iShares S&P 500 ETF (ASX: IVV).
However, there’s a few reasons why you might want to stick to Australian shares. No franking credits and currency risk are two of the main considerations.
Otherwise, you should pick a group of high-quality Aussie shares with good growth potential and competitive advantages such as Costa Group Holdings Ltd (ASX: CGC), MNF Group Ltd (ASX: MNF) and Challenger Ltd (ASX: CGF).
Step 3: Think long-term
Investing is not something that makes you rich in a month or even a year. It takes a long time for companies to grow profit and sometimes even longer for the market to realise how good that share is.
Every investment you make should be with a timeframe of at least three years in mind. Five years is better and a decade is by far a better time horizon.
Compound interest takes time (duh!) to work.
Step 4: Don’t panic
The price of entry into this great wealth-building world is volatility. Being able to buy or sell a share nearly every weekday of the year is good optionality. However, the share market is full of different buyers and sellers who think businesses are worth different prices.
If a recession happens sometimes people think businesses are worth significantly less than before, even if the actual business hasn’t changed. It’s important to remain focused and keep thinking long-term in these situations.
Step 5: Be rich
Save, invest, hold good shares for the long-term. It’s really that simple to becoming rich.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended Challenger Limited, COSTA GRP FPO, and MNF Group Limited. 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 Scott Phillips.
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