Building a $1 million portfolio with ASX shares and the magic of compound interest

Investors can supercharge their long-term gains by tapping into the magic of compound interest.

| More on:
A businesswoman in a suit and holding a briefcase marches higher as she steps from one stack of coins to the next.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Building a $1 million portfolio from ASX shares may sound out of reach for many investors.

They may think it would take a lifetime. Or that you'd need a sizeable cash pile to even get started.

But by tapping into the power of compound interest and keeping a long-term investing mindset, these investors might be surprised at the time and size of the initial investments it could take to achieve that $1 million from ASX shares.

Let's have a closer look.

Two ways to go

Newer investors, or those short on research time, might want to stick to a more passive approach to investing in ASX shares.

You can do this by investing in a wide range of ASX exchange-traded funds (ETFs), which offer diversification with a single stock.

Some ETFs track particular market sectors, from gold miners to financial stocks. Others are intended to mimic the performance of an entire index, like the S&P/ASX 200 Index (ASX: XJO).

Look for ETFs with low management fees, so as not to eat into your long-term, compound interest boosted returns.

If you're comfortable picking your own ASX shares, or have access to some trusted advice, this opens the door to potentially higher returns, though with some added risk.

Here's what I mean.

On the higher return end, shares in Nuix Ltd (ASX: NXL), which develops and distributes software, are up a whopping 108% in 2023.

And shares in Codan Ltd (ASX: CDA), which provides products and services in communications, metal detection and mining technology, have soared 92% this calendar year.

You're really unlikely to find those kinds of returns with ETFs.

So, what about those risks?

Well, if you'd invested in gold miner St Barbara Ltd (ASX: SBM) on 3 January this year, you'd be nursing a loss of 36% today.

And investors who bought into biotech company Mesoblast Ltd (ASX: MSB) on 3 January will be down 53%.

So, if you're going to be picking individual ASX shares to build your wealth, choose wisely.

How long will it take to reach $1 million with ASX shares?

The amount of time it will take to reach my $1 million goal will depend on two factors.

How much I invest each month, and what types of returns I manage.

Now, there are no guarantees as to future returns.

But in building my ASX share portfolio, I'll aim for an average annual return of 10% to 11%. And I'll plan to reinvest any dividends I get to help boost those returns.

Splitting the difference here, I'll be happy to achieve 10.5% returns over the long term.

And I'll diligently put aside $200 each week, or $10,400 a year, to invest.

Now let's plug those figures into the old compound interest calculator.

Here's what it tells me:

After five years the total value of my ASX share portfolio will be $64,128. That rises to $169,775 after 10 years and $630,560 after 20 years.

Just five years later, after 25 years, the total value of my investments will be $1,102,942.

That's a tidy sum.

And, thanks to the magic of compound interest, I'll have only invested $260,000 of my hard-earned money to get there.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A woman in a hammock on her laptop and drinking a smoothie
Dividend Investing

$8,000 in savings? Here's how I'd aim to turn that into $1,151 in monthly passive income

Here’s how I’d go about investing in ASX dividend shares.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Here are 2 top ASX 200 shares I'd buy now for passive income

These ASX 200 stocks sit at the top of my passive income play list.

Read more »

Woman and man calculating a dividend yield.
How to invest

Is right now a good time to buy ASX shares or should I wait?

With the All Ords up 12% in six months, should I buy ASX shares right now?

Read more »

Invest written on a notepad with Australian dollar notes and piggybank.
How to invest

Buying ASX shares? Experts reveal what they wish they knew before investing

Learn how to avoid costly mistakes by listening to your investment elders (who have already made them).

Read more »

A young well-dressed couple at a luxury resort celebrate successful life choices.
How to invest

3 ASX shares to buy now that could help you retire a millionaire

Analysts think these stocks are buys. Here's why they could help you grow your wealth.

Read more »

A woman in a hammock on her laptop and drinking a smoothie
Dividend Investing

Here's how I'd aim for a tonne of passive income from $20,000 in an ASX share portfolio

You might be surprised how much passive income you could earn from $20,000 invested in ASX dividend shares.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
Dividend Investing

Maximizing dividends: 3 of the best ASX shares for income investors right now?

I think these three ASX 200 dividend shares deserve a place in most every passive income portfolio.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
How to invest

2 ASX shares to buy in May 2024 and hold for the next 10 years

Analysts see big return potential from these shares.

Read more »