The stock market is a millionaire (and billionaire) factory. Many of the wealthiest people on the planet have made their riches by owning shares in listed companies. While most of us may never own founding stakes like those held by Elon Musk or Jeff Bezos, we can still buy into ASX shares to help grow our wealth enormously.
Alas, millionaire status is rarely stumbled upon. Owning portions of great companies can do the heavy lifting during the journey, but it sure helps to have a game plan.
So, here's how I would go about building a million-dollar portfolio. A smooth million could be just the beginning if the foundations are right.
Build a habit
Wealth creation starts with forming simple, repeatable habits. There are no get-rich-quick schemes in life. Amassing large sums of money is a consistent practice involving doing the basics repeatedly with discipline.
Warren Buffett, famed billionaire investor and CEO of Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B), said, "Investing is simple, but not easy." When asked why everyone doesn't apply his simple investing approach that has created fortunes, Buffett quips, "Because nobody wants to get rich slowly."
The problem is the returns from investing are unintuitive because compounding is unintuitive.
If I told you it took 20 folds of a piece of paper for it to be 130 metres thick… how many folds would you guess are needed to be as thick as the distance between the Earth and the Moon (384,400 kilometres)?
Maybe 10,000… or 5,000… surely at least 1,000 folds, right? The answer is 42 folds. A little more than twice the number of folds to reach 130 metres thick.
That's why building a habit of consistently investing in ASX shares would be my first step toward a million dollars. Many financial apps make this easy through micro-investing or scheduled direct debits without lifting a finger.
My next step would be establishing how to invest to reach a million dollars.
Diversification is an incredibly handy tool in an investor's arsenal to avoid pouring years' worth of work down the drain from one or two bad investments — however, the benefits of adding more ASX shares to a portfolio become negligible at a point.
For some, an exchange-traded fund (ETF) tracking the S&P/ASX 200 Index (ASX: XJO) is their style. For me, 200 companies are too many. I'm more comfortable with picking out the best ASX shares and ditching the subpar ones using some fundamental analysis. In doing so, I aim to outperform the benchmark's historical ~9% return.
I'm not Warren Buffett, so an average return of 22% may not be on the table. But, if I can manage 15% per annum on average, the time it takes to build a million-dollar portfolio could be reduced by eight years — assuming a $10,000 starting balance and $600 invested each month.
To do this, I would invest in five to seven exceptional individual companies and use ETFs to diversify to 10 ASX shares. That way, my portfolio is still diversified while maintaining a larger allocation toward companies I believe can perform better than the broader market.
Picking the right ASX shares for the job
Millionaire status will be out of reach if I pick value traps or serial underperformers. The million-dollar question is: how do I invest in the right ASX shares?
In my opinion, there are three essential ingredients for selecting great companies:
- Moat: brand, technology, patents, first-mover advantage, etc.
- Management: long tenure (experienced), skin in the game, good track record for capital allocation
- Longevity: large unpenetrated market, operated for decades, conservative balance sheet
Keep in mind time is our golden goose here. I need to find shares in ASX companies capable of not only existing in 20-odd years' time but thriving. A couple of ASX shares I believe fit this criteria are Pro Medicus Limited (ASX: PME) and Resmed CDI (ASX: RMD).
Additionally, I would aim to buy such ASX shares at attractive prices. However, I'm more lenient on valuation the higher the quality of the business.