To become a millionaire requires either a lot of time, hard work or luck. Getting there investing on the ASX is a great option, but not a get rich quick scheme. Here’s how you do it.
The adage goes “you need money to make money”. Unfortunately there is some truth to this and as an investor you’ll need to allocate some of your primary source/s of income (generally a salary) to investing. Find a course, budget or accountability partner that can help you have some money in the bank at the end of each month.
Understand yourself and your goals
Investing is inherently risky. Because of this you should understand your needs and wants for the next 3 to 5 years and potentially way further into the future. This allows you to determine your risk profile and invest accordingly. As general rules try and follow the below:
- only invest with money that you don’t need within 3-5 years;
- the longer your investing time horizon is or the further you are from retirement, the more risk you can take on; and,
- have your house in order with regards to the rest of your finances.
Create an ASX investment portfolio based on fundamentals
When you purchase a stock, you’re buying a piece of an operating business. Identify a group of at least 10 to 15 companies that you believe have great futures. A service like the Motley Fool can help to narrow down that list or generate ideas.
The portfolio of stocks you create should be well diversified. It should include small cap, mid cap and large cap stocks; Australian and international companies; and a range of different industries.
One way to instantly diversify is with an ETF like VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT). MOAT is a portfolio of roughly 50 companies, listed mainly in the US, which Morningstar believe have competitive advantages.
Some investors will need income from their portfolios in the form of dividends. The ASX has plenty of great options like Rural Funds Group FP Units Stapled Securities (ASX: RFF) and Wesfarmers Limited (ASX: WES).
More risk accepting investors may want to look at high growth companies like Twilio Inc. and Appen Limited (ASX: APX).
Let time and capitalism work their magic.
As I mentioned at the start of the article, time is a huge component of becoming rich using the ASX. The power of compounding is truly spectacular. Warren Buffet is just one famous investor to benefit from and applaud compounding. Starting with a $20,000 investment, investing $1,000 a month, and returning 10% per annum in the market will make you a millionaire in 22 years.
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Motley Fool contributor Lloyd Prout owns shares of Twilio Inc. and VanEck Vectors Morningstar Wide Moat ETF . The Motley Fool Australia owns shares of and has recommended Appen, RURALFUNDS STAPLED and Wesfarmers Limited. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF. 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.