Turning a small investment into a substantial portfolio might sound like a financial fairy tale, but in the world of ASX shares, this dream can become a reality.
The magic ingredients? Consistency, patience, a buy and hold attitude, and compounding.
Investing $500 a month
Although a $500 investment might seem insignificant, it’s the consistent application of this amount that works wonders over time. Regular monthly investments into ASX shares allow you to capitalise on the power of compounding and dollar-cost averaging. The latter is a strategy where you invest a fixed amount at regular intervals, regardless of market fluctuations. This approach not only reduces the impact of market volatility but also encourages a disciplined investment habit.
Diversification is the backbone of a strong investment portfolio. Allocating your $500 monthly investment across a diversified group of quality ASX shares helps mitigate risks and capture opportunities across various sectors. Thankfully, the Australian share market offers exposure to a range of sectors including finance, technology, retail, healthcare, and resources. They can all play a role in your diversified portfolio, allowing you to tap into the broader growth potential of the Australian economy. Investors could also leverage exchange-traded funds (ETFs) to gain access to other markets.
The buy and hold mindset
One of the most critical components of turning a small investment in ASX shares into a substantial portfolio is embracing the buy and hold approach. Warren Buffett famously said, “The stock market is a device for transferring money from the impatient to the patient.” By resisting the urge to frequently trade based on short-term market fluctuations, you give your investments the time they need to weather market cycles and realise their full potential. In addition, the longer you invest, the more you can benefit from the power of compounding.
Reaching your $500k goal
With an average total return of 9.6% per annum since 1993, history shows that investing $500 into ASX shares each month could have turned into $500,000 in a little over 23 years. That means a 30-year-old could have built up a sizeable nest egg not long after turning 50 if they had followed this strategy. And while it is impossible to say what the market will do over the next 30 years, these returns are in line with the historical average. I feel this makes it a realistic goal for investors to target in the future.