Investing in ASX shares can be a truly rewarding experience in every sense of the word. But many investors avoid the stock market due to the perception of it being a risky place to keep their money.
While this is true to a certain extent, the reality is that if you invest prudently, the chances of obtaining a compelling rate of return on your money are a lot higher than you losing your hard-earned dollars.
Today, we're going to prove this concept out by looking at what kind of return an investor can expect by ploughing $200 a month into ASX shares.
Assigning an absolute rate of return from the share market is a tricky task. Obviously, each stock portfolio is different. If an investor owns Commonwealth Bank of Australia (ASX: CBA), BHP Ltd (ASX: BHP) and CSL Ltd (ASX: CSL) shares, they are going to have a completely different experience than someone who buys Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Xero Ltd (ASX: XRO) shares.
To get around this problem, let's look at the returns one can expect from an ASX index fund. Index funds are popular investments on the Australian stock market. They allow investors to own a vast swathe of ASX shares in one single investment.
Your typical ASX index fund will hold either the largest 200 or 300 shares on the Australian markets, weighted towards market capitalisation (company size).
In this way, an ASX index fund will give you something akin to an average return of the entire ASX. As such, it's a great investment to analyse if you're wondering what the average return from the Australian stock market might be.
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What kind of returns can one expect from ASX shares?
The Vanguard Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that also happens to be the most popular index fund on the ASX. It tracks the S&P/ASX 300 Index (ASX: XKO), which means it gives its investors diversified exposure to the largest 300 individual stocks on our share market, including the six named above.
So what kind of returns can we expect from this ETF? Well, We should never use past performances as an oracle of future returns. However, this index fund has returned an average of 8.98% per annum (as of 31 May) since its ASX inception in May 2009. That 8.98% consists of both capital gains and dividend returns.
Let's assume VAS continues to appreciate at this rate for argument's sake. If one invests $200 every month into this index fund, it will build up to a portfolio worth $15,390 after five years of investing. That would grow to $39.148 after ten years and to $134,486 after 20 years.
If someone kept up this simple habit over a 40-year working lifetime, they would be left with a nest egg of $937,881.
If that investor managed to increase their monthly contribution to $300, they would be looking at a 40-year balance of roughly $1.41 million. That's more than enough for a comfortable retirement, even if we don't account for superannuation.
This exercise just goes to show the power of investing consistently in compounding assets.
