Investing in the stock market is one of the best things that people can do for their long-term finances. Enough time and compounding could enable someone to reach a portfolio value of $1 million.
Over the long-term, the share market has delivered an average return per year of around 9% to 10%, which is a solid growth rate. A $100 investment could double in eight years.
Those returns I've talked about are what the share market has delivered over the decades, through the crashes and uncertainty.
I'm not going to advocate investing in the most speculative small-cap ASX shares that we can find, as that's a high-risk approach and could end in disappointment and even big losses.
Let's have a look at how investing a relatively small amount each week can grow into a much larger figure with the stock market.
Wealth building with $80 per week
Household finances are taking a hit at the moment with a lot of inflation on goods, services and rent, as well as higher interest rates.
But, most households would ideally be able to find an extra $80 per week by specifically setting the money aside or making a few lifestyle changes.
Once we've got that money-saving system going, I'd put the cash into a high-interest savings account until I'd saved (at least) around $1,000 and then invest it.
Excluding the benefit of the earned interest in the bank account, saving $80 per week and achieving an investment return of an average of 10% per year for 33 years could reach $1 million after 34 years, according to the Moneysmart compound calculator.
A 25-year-old could become a millionaire before the age of 60. There would be two ways to accelerate that goal – invest more and/or earn a better return.
It's simple enough to invest more, but trying to achieve a higher return can be difficult. The stronger the return that investors try to achieve, the more risk that they may be taking on, and the more chance that something could go wrong.
Which ASX shares on the stock market could be good options?
There are many different choices that investors can go with, but choosing exchange-traded funds (ETFs) could be a good place to start.
One effective option could be the Vanguard MSCI Index International Shares ETF (ASX: VGS) which is invested in the global share market, with more than 1,400 holdings across numerous countries such as the United States, Japan, the United Kingdom, France, Canada, Switzerland and Germany.
It has an annual management fee of 0.18%, which is very low. Its net return per annum since inception in November 2014 has been 11.8%. Having said that, past performance is not a reliable indicator of future returns.
Investing $80 a week in the stock market and making average returns of 11% per annum would take less than 32 years to reach a portfolio value of $1 million.
We don't know what the returns in the future will be, but I think investing in the stock market is a very effective way to grow wealth over the long term.
