How much money can you actually make from investing in ASX shares? It's a question many potential investors want to know – and fair enough too. Investing requires you to invest your own precious capital, the fruits of your labour. Because of the volatile nature of the share market, this can be very difficult. It's never much fun to wake up and see the $2,000 you've invested is now worth $1,800.
So, here's how I like to think of it. Investing is a long-term game. If you think it's all about finding that one rocket share that will turn your $2,000 into $3,000, $4,000 or $10,000 by next week, I would recommend hitting the casino instead. That way, you've got similar odds but no brokerage to worry about.
In all seriousness, one of the biggest misconceptions that I hear about the share market is that it's no different from gambling. But a long-term strategy couldn't be any further from a game of blackjack.
ASX shares and compound interest
Put simply, successful investing is about harnessing the power of compound interest. That's interest earning interest earning interest. It's what Einstein supposedly called the 'eighth wonder of the world'. The benefits of compound interest are hard to see initially, but overwhelmingly obvious (and FOMO-inducing) before too long.
Let's illustrate. If a portfolio earns a return of 10% per annum, it will roughly double in value every 7 or so years (going by the rule of 72). Now a double is a double, no matter the value of what you are doubling. Going from $1,000 to $2,000 over 7 years doesn't sound too exciting. But going from $100,000 to $200,000? Starting to get somewhere.
What about $200,000 to $400,000? Or $400,000 to $800,000? Once you start going from $800,000 to $1,6 million, and then $3.2 million, you can start to appreciate the awesome power of compound interest. Legendary investor Warren Buffett wasn't a billionaire until he was more than 50 years' old. Today (40 years' later), the man is worth roughly US$79 billion. That's compounding at work for you.
So when you're thinking about how much money you can potentially make from ASX shares, it's all about the rate of return you can receive. If you manage 10% per annum on average, your portfolio can be expected to double in size every 7 years. If you make 12%, it will double every 6 years. 15%? Every 4.8 years.
So how can you manage returns like these? Well, it's not as hard as you might think. Simple passively managed exchange-traded funds (ETFs) will always give you the performance of the share market as a whole. The Vanguard Australian Shares Index ETF (ASX: VAS) simply holds the largest 300 companies on the ASX, all in one fund. Since it's inception in 2009, holding this one investment would have returned you an average of 8.18% per annum.
Over the past 10 years, the United States markets have done even better. Holding an S&P 500 index fund (tracking the largest 500 companies in the US) like the iShares S&P 500 ETF (ASX: IVV) has returned an average of 16.38% per annum over the last 10 years. These numbers don't indicate that these returns will continue forever. But it's a good place to start in my view.
Foolish takeaway
Of course, outperforming these market-tracking ETFs can be difficult. But we Fools think anyone with the right mindset and dedication can do it. So if you're wondering how much money you can make from investing in ASX shares, the sky is the limit. But the earlier you start, the more time you have for compounding to 'do its thing'. So what are you waiting for?
