Ever since buying my first ASX share, I've been ploughing most of my savings and wealth into the ASX stock market. Investing in S&P/ASX 300 Index (ASX: XKO) shares is, in my view, the best way to build wealth in Australia, period.
I've got nothing against property or other asset classes to be sure. But today, let's discuss why most of my savings are invested in companies, and not houses or bonds.
There are three reasons why I personally try to ensure most of my savings go towards investing in ASX shares.
3 reasons I invest my savings into ASX shares
The returns
Firstly, ASX shares are, and always have been historically, one of the best-returning asset classes you can buy into. Every year, our chief investment officer, Scott Phillips, takes stock of the annual Vanguard chart. This compares the returns of different asset classes over the past 30 years.
Last year's chart showed ASX shares handily outperformed cash, bonds and listed property, delivering an average return of 9.2% per annum over the 30 years to 30 June 2023. The only asset class to do better was US shares at 10% per annum.
Diversification
Secondly, we have diversity. It is inherently easy to diversify your wealth by investing in the share market. Whether you buy a simple index fund or invest in a portfolio of different ASX 300 shares, most investors don't find it difficult to spread out their investments amongst different industries, sectors and markets.
With just five companies, you can have exposure to Australian banks, miners, telecommunications providers, grocery stores and retailers. To be clear, we normally recommend a portfolio of between 15-25 different stocks to be adequately diversified, but you get the drift.
In contrast, a property requires you to lock up at least hundreds of thousands of dollars (if not millions) in one plot of land in a single suburb of a single city.
Investing in ASX shares means less tax
Thirdly, investing in ASX shares is very efficient from a taxation perspective. For one, you don't need to pay tax on any capital gains from your shares until you sell them. And even when you do, you will probably get a 50% discount on your capital gains tax if you've held the shares for longer than a year.
Dividend income is taxed as normal income. However, the franking credits that most ASX 300 shares pay alongside their dividends can help you minimise your tax bill.
Compare that to the full income tax you pay on any interest earned in a savings account or term deposit, and we have a clear winner in my view.
Foolish takeaway
So those are the three reasons I tend to invest most of my savings in ASX 300 shares. Of course, I still keep a proportion of my wealth in liquid cash as an emergency fund – enough to fund living expenses for several months.
I subscribe to the view that it is prudent financial practice to make sure that any unexpected expenses that life might throw at us can be paid without selling our investments at inopportune moments.
However, any surplus cash I rack up will eventually find its way into my ASX share portfolio. Now you know why.
