There are a range of investment styles and strategies that investors can use to generate strong returns over the long run.
However, the majority of them will share a number of traits in common that have contributed to their success. The good news is that there's nothing to stop the average investor from using these same techniques to grow their wealth. Or perhaps even become filthy rich with ASX shares.
Here are five easy steps to growing your wealth:
Start your investment journey early
There's no doubt that time is one of the greatest assets that an investor has at their disposal. This is because time allows you to leverage the power of compounding. In respect to compounding, legendary investor Warren Buffett once quipped: "My wealth has come from a combination of living in America, some lucky genes, and compound interest."
To demonstrate its power, let's look at it in action. According to research by Fidelity, despite a number of market events including the Global Financial Crisis, the bursting of the dot-com bubble, and COVID-19, the Australian share market provided an average total return of 9.6% per annum over the 30 years to December 2022. This means that a single $10,000 investment in the share market would have grown to be worth almost $160,000 at the end of the 30 years if it earned the market return.
Invest in ASX shares on a regularly basis
There are a number of benefits to investing regularly in the share market. One is dollar-cost averaging, which can reduce the impact of volatility on your purchase of shares. This is because volatility should actually work in your favour as you will be technically purchasing more shares when the price is low, and fewer shares when the price is high. In addition to this, investing regularly lets you benefit fully from compounding. As mentioned above, a single $10,000 investment would've turned into $160,000 if it grew with the market over the last 30 years. But investing $10,000 each year, ceteris paribus, would have turned into almost $1.7 million!
Buy top quality companies
Another way to become a successful investor and grow your wealth is to resist the temptation of buying hyped up shares that promise the world and deliver nothing. Meme stocks like Brainchip Holdings Ltd (ASX: BRN) and Weebit Nano Ltd (ASX: WBT) come immediately to mind. Instead, investors that buy quality companies with strong business models, sustainable competitive advantages, and solid growth prospects are likely to be rewarded with outsized returns over the long term. This has been key to Warren Buffett's success over multiple decades.
Reinvest your dividends
Many ASX 200 shares such as BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), and Telstra Corporation Ltd (ASX: TLS) pay their shareholders a dividend every six months. If you're not investing for income, then reinvesting these dividends can be a good way to generate wealth over the long term. Investors could choose to either participate in the company's dividend reinvestment plan (which pays you shares instead of dividends and sometimes at a discount to the prevailing share price) or simply reinvest the funds back into other areas of the market which potentially offer even greater returns.
Hold shares for the long-term
Buying high-quality ASX shares with a long-term view (generally at least a decade) is one of the best ways to grow your wealth as an investor. A great example of this is CSL Limited (ASX: CSL) shares. It listed on the share market over two decades ago when the government decided to privatise the Commonwealth Serum Laboratories business. A $10,000 investment on day one would have made you a multi-millionaire today. It is also important to note that this has not gone up in a straight line. In fact, numerous times over the years its shares have made considerable pullbacks. If you'd sold out on any of those occasions you would have sacrificed significant future gains.
