The ASX share market is a wonderful place to find investments that can create excellent wealth. Aussies can potentially even become a millionaire with ASX stocks.
Investors shouldn't go into investing expecting to become rich quickly though. If anything, it's more likely to happen if people invest with a 'get rich slowly' attitude.
I'm going to talk about some ASX tips that can help someone get there, though it's not guaranteed.
Invest regularly
We need money to invest, so to start with we need our personal finances to deliver cash flow and savings so we can put money to work. That may be trickier for some households at the moment.
Investing isn't something we do once and then never do again. It's a good idea to regularly invest because having a plan and building an investing habit is one of the best things we can do for our future.
There may be times when the ASX share market goes through pain – it may be less of a shock if we expect bear markets to occasionally happen. In fact, a market crash can be the best time to invest because of the cheap prices.
As the great investor Warren Buffett once said:
Be fearful when others are greedy and greedy when others are fearful.
Compounding
Albert Einstein once supposedly said this about compounding:
Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.
A 10% return turns $100 into $110 after year one, another 10% return becomes $121 after year two – it's that extra money where the interest earns interest that the snowball really gets rolling. Compounding turns $100 into $200 in less than eight years.
Holding good investments for a long period of time gives us a good chance of creating wealth because of the compounding of revenue, profit and hopefully the share price.
The late Charlie Munger once said:
The first rule of compounding: Never interrupt it unnecessarily.
If an investment still has plenty of growth potential, we may not necessarily need to sell it because a sale could lead to capital gains tax and brokerage.
Choose good investments
I think it's much easier to do well with companies that have quality metrics and expectations for growth.
For plenty of investors, just choosing a good exchange-traded fund (ETF) can work very well. ETFs can enable us to get a diversified portfolio with just one pick. In this space, I like names like Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vaneck Morningstar Wide Moat ETF (ASX: MOAT).
For individual companies, I'd look for businesses that have plenty of scaling potential. That could be a business expanding its store numbers, a software business growing revenue strongly, or perhaps it's a business expanding into another area that could help profit grow over time.
There are some factors that are appealing such as a growing return on equity (ROE), good leadership, strong competition advantages and so on. A dividend isn't essential, but it's helpful for returns.
I like to regularly write about stocks that I'm looking at (or investing in).
ASX millionaire
Using the Moneysmart compound interest calculator, we can see that if we invest $2,000 per month into the ASX share market, it'd become $1 million in less than 18 years if it returned 10% per annum, starting from $0.
