If you want to build wealth in the share market, buy-and-hold investing is arguably one of the best ways to do it.
To demonstrate, let's look at what could happen if $50,000 was invested in ASX shares and allowed to compound over the next 10 years.
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The long-term return of the share market
Over long periods, the Australian share market has delivered strong total returns.
Those returns come from two main sources. The first is capital growth as company earnings expand and share prices rise. The second is dividends paid by companies like Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP) to shareholders.
When both are combined, it is not unreasonable to expect long-term returns somewhere around the high single digits per year.
For the sake of this example, let's assume a total return of 9% per annum. That's not guaranteed and the market rarely moves in a straight line, but it sits within the range of long-term historical returns for equities.
Importantly, this assumes dividends are reinvested rather than spent, allowing compounding to do its work.
The power of compounding
Compounding is one of the most powerful forces in investing.
Instead of simply earning returns on your initial investment, you begin earning returns on the gains generated in previous years.
At first the impact can feel modest. But over time it starts to accelerate.
If $50,000 earned a 9% annual return and those returns were reinvested each year, here's how the investment could grow over a decade:
Year 1: $54,500
Year 3: $64,750
Year 5: $76,900
Year 7: $91,400
Year 10: approximately $118,400
By the end of the 10-year period, that original $50,000 investment could potentially grow to roughly $118,000.
In other words, the portfolio would have more than doubled.
The market rarely moves in a straight line
Of course, real investing never looks as smooth as a spreadsheet.
There will almost certainly be years where the market falls. Corrections, volatility, and negative headlines are simply part of the investing journey.
But historically, patient investors who stay invested in quality businesses and reinvest dividends have been rewarded over time.
The key is focusing on the long-term compounding of returns rather than the short-term ups and downs of the market.
Building wealth over time
A decade may feel like a long time, but in investing terms it is actually quite short.
Many of the world's most successful investors have built their wealth over several decades by allowing compounding to work quietly in the background.
For investors who continue adding new money to their portfolios over time, the results can become even more powerful.
Foolish takeaway
A $50,000 investment in ASX shares might not sound life-changing at first.
But if that investment were able to generate an average return of 9% per year and those returns were reinvested, it could grow to roughly $118,000 in 10 years.
That's the power of long-term investing and compounding. And for patient investors, the real magic often begins after the first decade.
