Building wealth through ASX stocks could be one of the best choices because of the power of compounding and profit growth.
ASX stocks can provide both capital growth and dividends (passive income). That sounds good to me!
If someone were to start investing at the age of 25, they could grow their wealth enormously by the time they wanted to retire.
Time will tell what the usual retirement age will be in 40 or so years. It could be 65, 70 or even older. But, I'm going to show how a 25-year-old investor could grow their wealth over the next four decades.
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Compounding potential
Every household's finances are different, so I can't say for sure what level of savings someone would be able to unlock for investing. What I do know, is that we want to get to a place where we are spending less than our income so we have money left over to invest.
When we're able to create savings most months (or every month), then we can put that money towards investing into the ASX stock market.
Investing in shares is simple, comes with a lot less paperwork and costs than property, doesn't require debt and can deliver great returns in we invest in the right area.
Over the ultra-long-term, shares have returned an average of around 10%. At that rate, the value of the shares would double in just eight years.
Let's imagine a 25-year-old was able to invest $1,250 each month on average into ASX stocks. That would become $6.64 million after 40 years, with around $6 million of that being generated by returns and the rest being from the monthly deposits.
I'm not sure what portfolio size will be needed to reach a comfortable retirement, but $6 million may be more than enough.
Someone may not want to work as long as that.
After 30 years of following that strategy, the portfolio would be worth $2.47 million.
After 20 years it'd be worth $859,000, which may not quite be enough.
Therefore, it could take less than 30 years for someone to build a substantial wealth fund.
Which ASX stocks to invest in?
The easiest way to invest could be exchange-traded funds (ETFs) that provide diversified exposure to the share market such as BetaShares Australia 200 ETF (ASX: A200) and Vanguard MSCI Index International Shares ETF (ASX: VGS).
Listed investment companies (LIC) such as Australian Foundation Investment Co Ltd (ASX: AFI), WAM Microcap Ltd (ASX: WMI) and L1 Long Short Fund Ltd (ASX: LSF) could be compelling options.
Or, some of country's best ASX growth shares such as Temple & Webster Group Ltd (ASX: TPW), Tuas Ltd (ASX: TUA) or TechnologyOne Ltd (ASX: TNE) could be compelling picks.
