How to become rich by investing in ASX shares

Becoming rich from ASX shares is possible, but it does not usually happen quickly.

There will always be stories of investors who picked the perfect small-cap ASX stock at the perfect time. But for most people, a more realistic path is much simpler.

It involves investing regularly, owning quality assets, reinvesting dividends, and giving compounding enough time to work.

That may not sound exciting, but it can be extremely powerful.

Start with consistency

The first step is getting money into the market regularly.

This could be $200 a month, $500 a month, or more depending on someone’s financial position. The exact amount matters less than the habit.

Regular investing also helps remove some of the pressure of market timing. Investors will buy during strong markets, weak markets, and everything in between. This is known as dollar-cost averaging.

It does not guarantee a profit or protect against losses, but it can make the process easier to stick with.

Own quality businesses

The next step is deciding what to buy.

One approach is to focus on high-quality ASX shares with strong market positions, reliable earnings, and long growth runways. Companies such as Wesfarmers Ltd (ASX: WES), Macquarie Group Ltd (ASX: MQG), and REA Group Ltd (ASX: REA) are examples of businesses that have created significant wealth for shareholders over long periods.

Another option is to use exchange traded funds (ETFs). These can provide exposure to hundreds or even thousands of shares in a single trade, which can be helpful for investors who do not want to pick stocks.

The key is diversification. Building wealth should not depend on one company, one sector, or one idea going perfectly.

Let dividends do more work

Dividends can play a role in long-term wealth creation.

Many ASX shares pay dividends, and some also come with franking credits. Investors who do not need the income immediately can reinvest those dividends to buy more shares.

Over time, those extra shares can generate their own dividends. This creates a compounding effect, where returns start producing more returns.

In the early years, the progress can feel slow. But as the portfolio grows, compounding can become much more noticeable.

Time is your friend

The biggest advantage some investors have is time.

If an investor put $500 a month into ASX shares and achieved an average annual return of 10%, they could build a portfolio worth more than $1 million after 30 years.

That return is broadly in line with long-term share market averages, but it is not guaranteed. Some years will be strong, while others will be weak or even negative.

The main thing is staying the course when markets fall. Selling during downturns can interrupt compounding and turn temporary volatility into permanent damage.

Overall, becoming rich from ASX shares is about making sensible decisions repeatedly, staying diversified, and allowing time to do the heavy lifting.

The post How to become rich by investing in ASX shares appeared first on The Motley Fool Australia.

More reading

• 3 ASX shares Warren Buffett would probably love right now
• 3 ASX defensive stocks to buy while sharemarkets are volatile
• 5 ASX dividend shares to buy with $5,000 this month
• Why is everyone talking about Wesfarmers shares this week?
• How combining superannuation and ASX shares can set you up for retirement better than property

Motley Fool contributor James Mickleboro has positions in REA Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group and Wesfarmers. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.