Building a million-dollar portfolio might sound like a pipedream to many market watchers, but with the right strategy, know-how, and, arguably, luck, it can be done. Not only that, I'd argue it can be done by investing in only a handful of ASX shares.
Indeed, that's how investing great Warren Buffett built a fair chunk of his more than US$100 billion fortune. The strategy also helped his company Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) post an average annual return of around 20% between 1965 and 2021.
Such a return would turn a $500 monthly investment into more than $1 million in just 20 years – before considering dividends. That's the power of compounding! Of course, past performance isn't an indication of future performance.
Here's how I would aim to build a $1 million portfolio by investing in only a few ASX shares.
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Taking Buffett's lead
Fortunes can be made by choosing the right ASX share to buy at the right time.
For instance, investing $1,000 in Fortescue Metals Group Limited (ASX: FMG) shares back in the early 2000s could see a shareholder boasting a $1 million stake in the iron ore giant today.
Buying big into a small number of shares is the strategy generally employed by Buffett. Right now, nearly 75% of Berkshire Hathaway's US$296 billion portfolio is made up of just five shares.
The investing great famously once said:
We think diversification, as practiced generally, makes very little sense for anyone that knows what they're doing.
Of course, diversification plays an important role in many investors' portfolios.
Investing in a broad variety of ASX shares can protect an investor's assets in the event of a downturn in a single sector or company.
But, as Buffett points out, protecting against risk also lessens the chance of realising market-beating returns.
How to pick winning ASX shares
However, it's not easy to identify millionaire-making ASX shares. Even Buffett balances his statement by noting investing in a non-diverse portfolio demands a high level of knowledge and experience.
The billionaire touts his strategy of finding undervalued, quality shares. But more than that, he analyses an underlying business from top to toe, considering its balance sheet and competitive edges, before even thinking about buying in.
However, once he does snap up a stake in a company, he aims to hold tight for years to come. In the meantime, he largely ignores the market's movements.
While that's no easy task, it's how I would aim to build a million-dollar portfolio by investing in just a few potentially market-beating ASX shares.
Though, even a perfect portfolio is bound to experience rough days and downturns as the years go by. Additionally, any return on investment, or even downside protection, can never be guaranteed.
