How I’d invest $40k in ASX shares and aim for $1 million

If I were looking to invest $40,000 into the Australian share market, I wouldn’t be aiming for a quick profit.

I would put my money to work over the long term with the aim of growing that investment into $1 million one day.

But how realistic is turning $40,000 into $1 million with ASX shares? The good news is that it is very realistic if you have time on your side, thanks to the power of compounding.

Turning $40k into $1 million with ASX shares

As of the end of 2021, the Australian share market had provided investors an average return of 9.58% per annum over a 30-year period.

Given that this is broadly in line with the historical returns generated on Wall Street, I believe it is fair to expect something similar over the next 30 years. Though, it is worth remembering that past performance is no guarantee of future returns.

If I were to make a single investment of $40,000 into the share market and earn that same level of return for 30 years, I would fall a little short of my aim at approximately $623,000.

However, it wouldn’t take too much longer to reach my target if the returns continued.

Although it has taken 30 years to grow my original investment by almost $600,000, the power of compounding means that it would take only another 5.2 years to take that number to the $1 million mark.

Getting there sooner

If I were able to make a few smaller investments along the way, I could potentially reach my goal even sooner.

Starting with $40,000 and then adding $500 a month, or $6,000 a year, would grow my portfolio to the $1 million mark after 25 years based on an average annual return of 9.58%.

Increase the annual contribution to $12,000 a year, and we’re there in approximately 20 years.

But which ASX shares should you buy?

If you want to invest for the long term, my advice is to focus on buying ASX shares with strong business models, competitive advantages, and favourable long-term outlooks.

I believe ASX shares Altium Limited (ASX: ALU), CSL Limited (ASX: CSL), and Xero Limited (ASX: XRO) tick these boxes, so they could all be worth a closer look.

Alternatively, investors could consider exchange-traded funds (ETFs) based on indices such as the Betashares Nasdaq 100 ETF (ASX: NDQ) and Vanguard Australian Shares Index ETF (ASX: VAS).

The post How I’d invest $40k in ASX shares and aim for $1 million appeared first on The Motley Fool Australia.

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More reading

• Don’t ‘save’ for retirement! I’d invest in dirt-cheap ASX shares instead
• These ASX growth shares have massive global opportunities: Goldman Sachs
• 5 reasons I’d consider buying the Vanguard Australian Shares Index ETF (VAS)
• My ASX shares fell 15% last year. Here’s what I’m doing now
• Xero earnings per share forecast to surge 180% in FY24: Morgans

Motley Fool contributor James Mickleboro has positions in Altium, BetaShares Nasdaq 100 ETF, CSL, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, BetaShares Nasdaq 100 ETF, CSL, and Xero. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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