The ASX share market has done incredibly well at growing household wealth over the long term. In this article, I'm going to outline some of the factors that could create excellent wealth.
Is $2 million achievable with $10,000?
There have been some very successful investors in the past who have generated astonishing returns. For example, iconic investor Peter Lynch achieved an average return per annum of 29.2% between 1977 to 1990 with the Fidelity Magellan Fund.
I'm not sure if anyone would be able to replicate Lynch's investment track record these days of almost 30% per annum for over a decade. Certainly, there are lots of well-equipped (financially and technologically) investors looking for opportunities.
And the good news is most people have more than 13 years to grow their wealth.
Indeed, compounding can grow our finances very quickly. It's a combination of the (average) return per year and how many years it is left to grow.
The ASX share market has returned an average of around 10% per annum over the long term though, of course, past performance is not a reliable indicator of future returns.
But at that rate, if I invested $10,000 into the ASX share market and it returned 10% per annum, I'd get to $2 million in under 54 years.
How I'd try to grow my wealth quicker
There are a small group of ASX shares that have delivered huge returns over the long term.
If we'd invested in the 2010s in businesses like Altium Limited (ASX: ALU), Pro Medicus Ltd (ASX: PME), WiseTech Global Ltd (ASX: WTC), Aristocrat Leisure Limited (ASX: ALL), Xero Limited (ASX: XRO), REA Group Ltd (ASX: REA), ResMed (ASX: RMD), and TechnologyOne Ltd (ASX: TNE) then we'd be sitting on gains of at least 1,000%.
Certainly, I think there are a lot of factors these businesses have in common.
Firstly, they were a lot smaller than they are today. It's typically much easier for a business to double in size from $100 million to $200 million than to go from $1 billion to $2 billion.
Another factor is that most of them have large total addressable markets. When a company expands beyond Australia's shores, it gives them a much larger potential customer base. That longer growth runway with clients means companies can potentially see more profit growth, enabling (hopefully) strong returns for a long time.
Next, I'd want to find businesses that are involved in technology in some way. Technology is very cheap to reproduce for new customers (meaning high gross profit margins) and those businesses can expand very quickly. I think that's why many of the best-performing businesses over the last 15 years revolve around technology, even if they're not specifically from the IT sector.
Finally, I'd suggest that businesses involved in digitising the world have a strong tailwind. The world is increasingly going digital and moving online.
No one can know what ASX shares are next going to deliver returns of 1,000%. But I think some of the smaller businesses that have some of the elements I've just outlined are: cancer screening and risk assessment business Volpara Health Technologies Ltd (ASX: VHT), online marketplace for local services business Airtasker Ltd (ASX: ART), emerging market classifieds investor Frontier Digital Ventures Ltd (ASX: FDV), and online furniture and homewares retailer Temple & Webster Group Ltd (ASX: TPW).
And I'm also backing affordable jewellery retailer Lovisa Holdings Ltd (ASX: LOV) to do well with its global store expansion plan, even though it's not involved in technology.
