There are a variety of reasons why you may be investing in ASX shares. It could be to save for retirement or to grow your wealth. You could also be investing to provide long-term financial security or to benefit from social trends you observe.
Regardless of the reasons why, building your portfolio will provide greater resources for your end goal. That’s why investors in ASX shares seek to increase the value of their investments over time. A larger portfolio means greater assets that can be used to fund a more comfortable lifestyle.
The size of your ASX share portfolio is a function of the amount invested, movements in share prices, and what you do with any returns received. You can’t influence share prices, but you can decide how much to invest and what to do with returns.
ASX shares produce returns either in the form of dividends or via capital growth. Dividends are the portion of profits that a company pays out to shareholders. Capital growth occurs when the share price increases above the price at which you bought the share.
Investors looking to build their portfolio can take advantage of both dividends and capital growth to grow their portfolio.
Whether you’ve just entered the share market or have been investing for years, here are a few tips that can help you increase the size of your portfolio (and minimise risk) over the long term.
1. Contribute some savings
If you want to start or add to your ASX portfolio, you will need some savings to invest. In order to amass savings, you will need to spend less than you earn.
For many people, the first step in building their wealth is examining their spending and understanding how they’re using their money. By exploring your spending patterns, you can gain an understanding of how you are allocating your income and make adjustments where required.
Utilising your resources more effectively will allow you to designate a greater proportion to savings, which can in turn be invested to add to your portfolio.
2. Reinvest your dividends
Some ASX shares pay dividends to shareholders which represent a distribution of profits by the company. What you do with those dividends is up to you.
If you want to build the size of your portfolio faster, you can reinvest dividends in the share market. This means you buy more shares with your dividends. These shares may in turn pay their own dividends. This allows you to benefit from compound returns, increasing your overall investment return.
These programs allow shareholders to automatically reinvest dividends as additional shares in the relevant company. The benefit to shareholders is that they never receive dividends in their bank account, so they aren’t tempted to spend them.
They also save on brokerage fees that would normally apply to share transactions. If you don’t want to opt into a dividend reinvestment program, you could direct dividends into a separate account and use the funds to buy different ASX shares.
Over time, these additional investments will add to the value of your portfolio, allowing you to build your overall wealth.
Whether you’re just starting out or have been investing for a while, you’ve probably heard of diversification.
So what is it? It’s similar to the old adage of not putting all your eggs in one basket. In share market terms, it means spreading your total investment over a range of ASX shares (and potentially international shares and other asset classes).
By spreading your investments in this way, you reduce the risk of your portfolio. Because different areas of the market react differently to the same event, having your investments allocated across a range of areas can help minimise overall risk.
4. Hold on
The share market goes up and down. This happens both on a day to day basis and over longer cycles. There is no guarantee that share prices will increase immediately or ever.
But over the long term, the share market as a whole tends to demonstrate positive returns. Individual ASX shares may see share prices soar, and others may see share prices flounder, but collectively, ASX shares have tended to provide positive returns over the long term.
For most investors, this means they also need to be in it for the long term. An investing time horizon of at least 5-7 years is recommended for share investments to allow time to ride out market cycles. It can be tempting to bail out when there is a market crash. However, this often proves to be a promising time to buy!
5. Consider growth shares
Depending on your reasons for investing, you may be more interested in growth or dividend shares. Dividend shares are known for paying dependable dividends. These ASX shares tend to be large, well-established businesses with reliable revenue streams, such as Commonwealth Bank of Australia (ASX: CBA).
Growth shares, on the other hand, tend to be companies at an earlier stage of their growth journey, with prospects for growing revenue and profits over time. Growth shares may not pay dividends, but many investors choose to invest in them in the expectation that they will in future and that the share price will increase in the meantime.
Whatever your reason for wanting to grow your portfolio, these five tips will get you started. However you choose to go about it, the key is to be consistent and focus on the long term.
Share markets will fluctuate over time, but the longer your time horizon, the more time you have to ride out market fluctuations and benefit from the upside.
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Kate O'Brien owns shares of BHP Billiton Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.