Becoming a stock market millionaire is a dream that I'm sure many investors share.
And unlike some dreams, such as winning the lottery, it is possible for you to turn this one into a reality.
Image source: Getty Images
Becoming a stock market millionaire
If I wanted to become a stock market millionaire, I would build a portfolio of up to 10 ASX shares and aim to hold them for the long term. Doing so will allow me to benefit from the power of compounding.
Compounding is when you receive interest on interest (or returns on returns in the case of the stock market). It helps explain why earning 10% per annum on a $10,000 investment turns into $11,000 after one year and almost $26,000 after 10 years.
In respect to portfolio size, the reason I would limit my portfolio to up to 10 ASX shares is that it means I have to really focus clearly on the companies that I will invest in. Essentially, I only want the crème de la crème in my portfolio.
I believe this gives me the best chance of achieving a return greater than the market over the long term.
Why do I aim to beat the market?
If you're investing over the long term, every single percent return you generate ahead of the market return can make a huge difference to your future wealth.
Historically, the share market has provided investors with an average total return of 10% per annum. And while past performance is not a guarantee of future returns, I would be disappointed if this was not the case again over the long term.
If it did return 10% per annum, it would mean that a $50,000 portfolio would grow to be worth approximately $550,000 after 25 years.
However, if you could generate an average total return of 13% per annum, that $50,000 portfolio would grow to be worth just over $1 million after the same period.
That seemingly modest extra 3% per annum has led to my portfolio growing to almost double the value that it would have been earning on the market return.
Starting from zero
If you don't have $50,000 available to invest, don't let that put you off.
For example, an investor that can commit $20,000 to a portfolio each year could potentially get there even quicker.
If you started today with a $20,000 investment and were able to earn that average 13% per annum return, you would get to the million dollar mark in just 15 years.
Overall, I believe that this demonstrates why building a portfolio with a handful of super, high-quality ASX shares is the smart thing for investors to do, rather than just bundling together a larger group that includes lesser-quality companies.
