Building a $1 million portfolio from ASX shares may sound out of reach for many investors.
They may think it would take a lifetime. Or that you’d need a sizeable cash pile to even get started.
But by tapping into the power of compound interest and keeping a long-term investing mindset, these investors might be surprised at the time and size of the initial investments it could take to achieve that $1 million from ASX shares.
Let’s have a closer look.
Two ways to go
Newer investors, or those short on research time, might want to stick to a more passive approach to investing in ASX shares.
You can do this by investing in a wide range of ASX exchange-traded funds (ETFs), which offer diversification with a single stock.
Some ETFs track particular market sectors, from gold miners to financial stocks. Others are intended to mimic the performance of an entire index, like the S&P/ASX 200 Index (ASX: XJO).
Look for ETFs with low management fees, so as not to eat into your long-term, compound interest boosted returns.
If you’re comfortable picking your own ASX shares, or have access to some trusted advice, this opens the door to potentially higher returns, though with some added risk.
Here’s what I mean.
On the higher return end, shares in Nuix Ltd (ASX: NXL), which develops and distributes software, are up a whopping 108% in 2023.
And shares in Codan Ltd (ASX: CDA), which provides products and services in communications, metal detection and mining technology, have soared 92% this calendar year.
You’re really unlikely to find those kinds of returns with ETFs.
So, what about those risks?
Well, if you’d invested in gold miner St Barbara Ltd (ASX: SBM) on 3 January this year, you’d be nursing a loss of 36% today.
And investors who bought into biotech company Mesoblast Ltd (ASX: MSB) on 3 January will be down 53%.
So, if you’re going to be picking individual ASX shares to build your wealth, choose wisely.
How long will it take to reach $1 million with ASX shares?
The amount of time it will take to reach my $1 million goal will depend on two factors.
How much I invest each month, and what types of returns I manage.
Now, there are no guarantees as to future returns.
But in building my ASX share portfolio, I’ll aim for an average annual return of 10% to 11%. And I’ll plan to reinvest any dividends I get to help boost those returns.
Splitting the difference here, I’ll be happy to achieve 10.5% returns over the long term.
And I’ll diligently put aside $200 each week, or $10,400 a year, to invest.
Now let’s plug those figures into the old compound interest calculator.
Here’s what it tells me:
After five years the total value of my ASX share portfolio will be $64,128. That rises to $169,775 after 10 years and $630,560 after 20 years.
Just five years later, after 25 years, the total value of my investments will be $1,102,942.
That’s a tidy sum.
And, thanks to the magic of compound interest, I’ll have only invested $260,000 of my hard-earned money to get there.
