One key reason why I invest in the share market is to increase my wealth over the long term.
By putting my money into quality ASX shares with a long-term view, I stand to benefit from the power of compounding.
Compounding explains why earning an average 9.6% per annum return would turn a single $20,000 investment into over $300,000 in the space of 30 years.
With that in mind, if I were to invest $20,000 into ASX shares now to try and build wealth, here's how I would do it.
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Find a balance between risk and reward
Investing in the share market is not risk-free like a term deposit or government bond. You can lose money if your investment turns sour. In light of this, I want to buy ASX shares that reward me for taking this risk.
For example, I recently bought Xero Limited (ASX: XRO) shares. It trades on high multiples, making it a higher-risk option. However, given the quality and popularity of its cloud accounting platform and its huge global market opportunity, I believe the long-term rewards from owning its shares are potentially compelling and offset this risk.
Whereas I have stayed well clear of semiconductor company Brainchip Holdings Ltd (ASX: BRN) because the risk/reward is incredibly unfavourable in my eyes. This is because the company has commercially unproven technology in an industry dominated by tech giants with huge budgets. I feel the chances of Brainchip being a success are so slim, it isn't worth risking capital. Especially when the company already has a mind-boggling $1.2 billion market capitalisation on next to no revenue.
Choose a diverse group of great companies then sit back
I would also look for diversity and quality when investing $20,000 into ASX shares.
While you might be attracted to the tech sector or the lithium industry for the big potential gains, you run the risk of underperforming or losing money if things go awry in either of these areas and you have too much exposure to them.
You only need to look at the tech sector in 2022 to see this. If you had a portfolio filled with tech shares and no exposure to miners such as BHP Group Ltd (ASX: BHP) or the big four banks, you would almost certainly have seen the value of your investment portfolio fall. Whereas a diverse portfolio might have navigated the market volatility better and potentially even generated a positive return.
In light of this, I would build a portfolio filled with quality companies from a few different sectors that I believe have the potential to grow at a solid rate over the long term. By doing this, I can sit back and watch my wealth grow over the long term without having to be too hands-on. Though, that doesn't necessarily mean set and forget. It would still be prudent to check in from time to time to ensure that the investment thesis was still intact.
All in all, I believe doing the above leaves you well-positioned on your investment journey.
