Building a portfolio of ASX shares capable of providing $34,000 of annual passive income might sound like a complicated task. However, I believe it can be done with just $250 a month – and without hours upon hours of market watching.
How? You may ask. Dollar-cost averaging. Here's how it works.
Setting a goal before buying ASX shares
Nearly every investing strategy starts with a clear and personalised goal. In this case, my goal is to realise $34,000 of annual income by investing just $250 a month.
Now, that instantly means my goal is likely a long-term one. To realise that sort of passive income, I need a portfolio worth $486,000, assuming I could boast a generous 7% dividend yield.
If I were investing just $250 a month, it could take more than a lifetime to build such a portfolio without realising any capital gains or reinvesting my dividends.
Fortunately, if I invest wisely, I'll very likely see notable returns.
Making my money work for me
While the market has its ups and downs, it has historically always moved higher.
For instance, the S&P/ASX 200 Index (ASX: XJO) tumbled around 7% in 2018 and soared 18% in 2019. However, despite the ebbs and flows, it's averaged a return of around 4.6% over the last 10 years.
That means, if one were to diligently invest in shares every month and not withdraw any capital gains, they could grow their ASX portfolio to be worth upwards of $486,000 in under 50 years, assuming they see an average annual return of 4.6%.
And that's before we consider the benefits of compounding their dividends!
And while they're at it, they'd be employing dollar-cost averaging.
What is dollar-cost averaging?
Dollar-cost averaging takes a lot of the guesswork out of investing. It doesn't aim to pick market fluctuations, valuations, or economic cycles.
Instead, it assumes that regularly investing a set amount will ultimately see an investor holding a greater number of shares over time.
That's simply because they'll end up buying more shares when prices are low and fewer when prices are high.
Which ASX shares should I invest in?
Of course, the next question is likely what to invest in.
I might consider turning to an exchange-traded fund (ETF) tracking an index like the ASX 200 or the S&P/ASX 300 Index (ASX: XKO), such as Betashares Australia 200 ETF (ASX: A200) or the Vanguard Australian Shares Index ETF (ASX: VAS).
If I wanted greater control, I might instead select a handful of diverse, high-quality shares to invest in each month.
While quality is subjective, I'd look for stocks with sustainable cash flows, competitive advantages over peers, and strong balance sheets. And, since my goal is passive income, they'd also have to pay dividends.
These would likely end up being ASX blue-chip shares, as I'd aim to keep my risks low due to my long investment timeline.
Right now, I think Westpac Banking Corp (ASX: WBC), JB Hi-Fi Limited (ASX: JBH), and Wesfarmers Ltd (ASX: WES) could fit that brief.
