Starting to invest in the ASX share market can be a daunting thing for investors who are just beginning.
There are potentially thousands of shares to choose from, where are you meant to start?
Firstly, it’s important to know that shares have returned an average of 10% per year over the many decades. It’s hard to grasp how powerful the effects of compounding are, but you double your money in less than eight years growing at 10% a year.
Of course, shares don’t grow by 10% each year, it’s an average. Some years may see rises of 20% or 25%, other years register drops of 10%, 15% or more.
Arguably the best investor in the world, Warren Buffett, has said that an investor could just choose to invest in a S&P 500 fund, like iShares S&P 500 ETF (ASX: IVV), which would give you everything you need.
It’s an index based on 500 of the biggest shares listed in the US, which operate in many different industries and generate earnings from all around the globe. It provides the diversification we need to safeguard from industry-specific risks.
We’ve all heard of the S&P 500’s largest holdings like Apple, Amazon, Microsoft, Berkshire Hathaway, Johnson & Johnson, Facebook and Alphabet (Google).
As long as the American and global economies keep growing then the S&P 500 will keep growing too. The iShares S&P 500 ETF has an extremely low annual management fee cost, leaving more net returns for investors. It could be the only investment that you need to make in your whole life with regular additional investments.
However, if you also want to invest in Australian shares then WAM Microcap Limited (ASX: WMI) could be a good option to consider. It invests in small shares on the ASX with market capitalisations under $300 million.
Smaller shares have the best chance of generating the biggest returns over the long-term because it’s much easier to double in size from $200 million to $400 million than $2 billion to $4 billion.
The Wilson Asset Management team have proven that they are very effective at generating strong returns, since inception WAM Microcap has generated an average return per annum of 20.1% before fees and expenses. However, it will likely be more volatile in downturns than a typical ASX fund.
WAM Microcap aims to pay a steadily-increasing dividend if it has the profit reserve and franking credits to do so.
Investing in shares doesn’t have to be scary or take up a lot of time if you have the right strategy from the start. I’d be happy to just to own shares of a S&P 500 fund and WAM Microcap. At the current levels I’d prefer to buy WAM Microcap after the recent volatility.
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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. 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 Scott Phillips.