If you don't have a lot of savings and want to change that and retire rich, then you could look at building wealth in the share market.
After all, if you can afford to put a little money into ASX shares each month, you could grow this into something significant in the future by following in the footsteps of legendary investor Warren Buffett.
Since the 1950s, the Berkshire Hathaway (NYSE: BRK.B) leader has smashed the market and built up a huge fortune by following a very simple investment strategy.
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Growing your wealth the Warren Buffett way with ASX shares
Firstly, it is worth setting yourself realistic expectations when it comes to investing in ASX shares.
Sure, you could get lucky and find a microcap that rockets and makes you rich overnight. But those are few and far between. Most people lose money when they gamble on microcaps, which is something we can ill-afford when we're trying to build wealth.
You never see Warren Buffett putting his hard-earned money into speculative small caps promising the world. So, you shouldn't if you want to replicate his investment style.
But what is his style? It's really quite simple. Buy the highest quality companies that you can find at fair valuations and hold onto them for the long term to benefit from compounding.
As I mentioned above, you don't have to buy "cheap" companies. Just buy at a fair price. Buffett once summarised this point, saying:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Essentially, you're far more likely to generate big returns if you buy a high-quality company at a fair price than you would buying an average company at a cheap price.
Let compounding do the hard work for you
Few people have benefitted as much from compounding as Warren Buffett. But there's nothing to stop you from doing the same.
Over the last 30 years, ASX shares have generated an average return in the region of 10% per annum. We can't guarantee that it will do the same again in the future, but I feel it is fair to base our calculations on this return. After all, it is in line with historical averages on Wall Street.
With that in mind, starting at zero, if you were able to invest $500 a month into ASX shares and achieved a 10% per annum return, you would have an investment portfolio valued at $100,000 after 10 years.
And if you were able to keep going from there, you would really start to see how powerful compounding can be.
Continuing for another 10 years won't add a further $100,000 to your portfolio. Far from it. After a total of 20 years of investing $500 a month and generating a 10% annual return, your portfolio would be worth approximately $362,000.
And keep going for another 10 years and your portfolio will grow to the $1 million mark, all else equal.
All in all, by investing regularly and following Warren Buffett's investment style, you have a good chance of growing your wealth materially even if you have no savings today.
