With news that the average Australian is now a millionaire you may be wondering how to get in on that wealth action.
I definitely believe anyone can create a $1 million portfolio by just investing $1,000 month into ASX shares.
The main thing you need on your side is compound interest. Imagine trying to save $1 million without compound interest of any sort. It would take around 20 years if you were saving $50,000 a year.
One of my favourite quotes (supposedly) came from one of the smartest people to ever live, Albert Einstein. He said "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't… pays it."
Compound interest is a very strong force, but it's simple to understand. It's just letting interest earn interest year after year. So what's the best way to access that?
Certainly not bank accounts or term deposits these days. With the RBA cutting interest rates twice over the past couple of months, we're left with Australian interest rates at 1%, so you'll be lucky to find many savings options with interest rates above 2%. Bonds won't help much either.
I believe the only two real options to consider are property and ownership of businesses, meaning shares. Taking on a lot of debt doesn't strike me as attractive, particularly in this uncertain era for property prices.
Over the decades, share indexes like Vanguard Australian Share ETF (ASX: VAS) and iShares S&P 500 ETF (ASX: IVV) have returned an average of 10% a year, which doesn't include the franking credits from Australian businesses.
If you invest $1,000 a month and it compounds at 10% a year it would take less than 24 years to reach a portfolio value of $1 million. Sounds great, right? A 20-year old could be a millionaire before the age of 45 if they can find the $1,000 a month.
Investing more than $1,000 a month would lead to a far greater portfolio size. Another way to get to $1 million would be if you could achieve returns of 12% a year, which would make the millionaire goal occur within 22 years.
How can you generate stronger returns? Well, if Dr Who would give me his time machine I'd go back and invest in shares like Altium Limited (ASX: ALU), a2 Milk Company Ltd (ASX: A2M), REA Group Limited (ASX: REA) and Pro Medicus Limited (ASX: PME).
