The whole point of investing our hard-earned money into ASX shares on our local share market is that we will one day be able to pull out more money than what we put in. In addition to receiving those dividends we get paid along the way, of course.
However, unlike a term deposit or government bond, there is no guaranteed rate of return when it comes to the share market. We must be prepared to accept whatever the return that the market has in store for us when we choose to buy ASX shares.
So, how much can we expect to end up with if we spend 10 years putting $500 every month into ASX shares?
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How much will $500 a month invested in ASX shares get you after a decade?
Well, it's hard to answer that question definitely, given the problem we've just discussed.
But we can give it a shot anyway, using historical data.
The share market as a whole has a long and strong history of delivering meaningful, if volatile, returns over long periods of time. Just take a good stock market proxy like an index fund.
One of the most popular ASX index funds is the Vanguard Australian Shares Index ETF (ASX: VAS).
This exchange-traded fund (ETF) represents an investment in the largest 300 companies listed on our local share market. These 300 companies are weighted by market capitalisation, which means that VAS' portfolio allocates more to the largest stocks than to the smaller ones.
As of 30 November, the Vanguard Australian Shares ETF has returned an average of 9.43% per annum since its initial ASX listing in 2009. Again, we can't count on this rate of return to continue. However, we can use it as a base-case scenario to make a reasonable projection.
So, what if one invests $500 a month (or $6,000 a year) into an ASX share portfolio that returns an average of 9.43% per annum over 10 years (and reinvests all dividends)? They would end up with a portfolio worth $100,424.
That $100,424 consists of $60,000 in cash contributions. The remaining $40,000 comes from the compounding of our investment returns. Not a bad effort.
Time in the market
Of course, we can boost these returns in a number of ways if we really want to fast-track our wealth-building. Let's say an investor chooses to pick individual stocks and beats the market performance over this decade with a 12% average return (a hard task, I might add).
Under that scenario, our final sum would look like $116,670.
But let's say our return remained at 9.43% per annum. Only our investors stretched to investing $800 every month instead of $500. Under this scenario, they would end up with a total of $160,678.
What if our investor stuck with the $800 every month but also got that 12% average? Well, they would have $186,671 by the end of the decade.
As you can see, getting the best bang for your buck from ASX shares depends on time in the market, as well as discipline. Consistently investing in quality ASX shares over long periods of time is the best path many of us have available to build wealth in Australia.
