Legendary investor Warren Buffett has managed to build a massive amount of wealth through the power of investing and compound interest. Certainly, ASX shares can help grow our own wealth using the same principles.
Businesses have a powerful ability to reinvest in themselves and potentially make more profit than the year before.
For example, Coles Group Ltd (ASX: COL) can open another supermarket and then generate earnings from that new location.
There is no 'right' age to start investing. People can invest in themselves with education or learning a new skill that can unlock far more earning potential than what shares can do in the short term. Also, the goal of life isn't necessarily to accumulate as much money as possible.
I think there is a balance between putting money towards building wealth and spending money to enjoy life now.
ASX shares can help build wealth
The great thing about ASX shares is that they can help grow wealth over a long period of time. While there are invariably some periods of volatility, the ASX share market's historical return is an average of 10% per annum with dividends reinvested. But, past performance is not a guarantee of future performance and sometimes the market does go backward.
However, Warren Buffett's advice is to keep investing "through thick and thin, and especially through thin".
It's the interest that earns interest that can make the biggest difference to wealth-building over time.
Imagine a $1,000 investment that grows at an average of 10% a year. In year one, it grows to $1,100, adding $100. In year two, if it goes up 10% to $1,210 – that's an increase of $110. In year three, another 10% increase turns into $1,331 – a rise of $121. Of course, the actual performance of the share market doesn't go like that. It isn't consistent each year.
How much wealth an investor can build depends on multiple factors, including how much they put in, the amount of time they leave the investments to compound, and the rate of return.
But, if an investment were to make an average of 10% per annum over 20 years, investing $500 a month would turn into just under $344,000.
Which investments to consider?
There are a number of different ways to invest in ASX shares. One of the increasingly popular ways is through exchange-traded funds (ETFs) which allow investors to invest in a whole group of businesses at once, enabling diversification.
The biggest ETF on the ASX is the Vanguard Australian Shares Index ETF (ASX: VAS) which tracks the S&P/ASX 300 Index (ASX: XKO) – 300 of the biggest businesses on the ASX.
Investors can also build a portfolio themselves. ASX blue chip shares are seen as highly reliable. These include Telstra Group Ltd (ASX: TLS), National Australia Bank Ltd (ASX: NAB), CSL Limited (ASX: CSL), and Wesfarmers Ltd (ASX: WES).
Small-cap ASX shares may have more growth potential, but many are riskier, so it could be worthwhile having an expert assist in the choosing of those opportunities.
