3 steps to build a $1 million ASX share portfolio

I reckon many Australians would love to have a $1 million ASX share portfolio. That represents significant wealth; it’d unlock bountiful passive income and provide financial security.

It can be a fairly simple journey to reach $1 million, but it’s certainly not easy, particularly with a higher cost of living these days. It may not be possible for every Australian, but it’s not impossible.

For starters, full-time working Australians regularly receive superannuation contributions thanks to the mandatory superannuation guarantee (SG). That alone can help plenty of Australians build a nest egg worth hundreds of thousands of dollars (if not millions) over the decades.

But this article isn’t specifically about investing in ASX shares in superannuation. The plan focuses on building wealth outside super, which could be particularly useful for people who want to create financial independence and potentially retire earlier than their mid-60s.

Having a $1 million portfolio could unlock significant cash flow for an investor. For example, with a 4% dividend yield, $1 million could create $40,000 of dividend income. A 5% dividend yield could create $50,000 of annual passive income.

In finance spaces, people talk about a 4% safe withdrawal rate (including probably increasing the withdrawal dollar amount for inflation each year) as being a way to live off the money without it running out during retirement. I like that type of plan, particularly when you consider how the ASX share market has returned more than 4% per year over the long term, so the portfolio balance could continue increasing over the years.

Let’s look at the three steps I’ suggest, and what I’m using, to build towards a $1 million ASX share portfolio.

Get personal finances in order: earn and save

Personal finances are the foundation of a good investment footing.

Earning and saving is what creates the money to invest and the financial stability to stay invested during all economic conditions.

Boosting earnings is one of the best things we can do for our finances.

Of course, growing our income is easier said than done. It could involve taking on some more hours of work, learning a new skill or tool, getting a qualification or creating a second source of work income (either as an employee or as a business).

We don’t need to bring in more income of course, but this is about creating flexibility in the household finances to be able to start building wealth with investments, or else the net worth won’t change.

It could involve a lot of hustling to bring in that second income. As an example, when I first started writing part-time at Motley Fool a decade ago, I was still working full-time in my other job. The extra income helped my household have the cash for investments. Again, it’s a choice of how (or if) we grow our income.

The other side of the coin is the spending. Spending less than we earn is a key factor in reaching a $1 million ASX share portfolio (particularly outside of superannuation).

Someone earning $50,000 and saving $10,000 each year could build their non-superannuation wealth faster than someone earning $150,000 but they only save $5,000 per year.

Motley Fool isn’t a frugal tips website and every household has a different financial picture, so for people who want to reduce spending, you’ll need to figure out what makes sense. But, things like giving Aldi a go for food shopping, making bulk meals, avoiding consumer-related debt, buying second-hand items where it makes sense (such as cars) and so on could make a big difference.

I also think it’s a good idea to have an emergency fund. Start with $1,000 in a savings account and build toward three to six months of living expenses, which is particularly important when a household relies on a main breadwinner. You don’t want to have to sell shares during weak economic times because you need the cash.

Consistently invest in (ASX) shares

Once we have regular monthly savings and an emergency fund, we can start investing in the ASX share market.

Consistently putting money into the stock market is a good routine and helps you buy (more) when the market is weak. I love it when the stock market falls because it means better prices. As Warren Buffett, one of the world’s greatest investors, once said:

To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.

Whether it’s investing $500 a month, $1,000 a month, $2,500 a month or even more, I think it’s great to regularly put money into the market. Dollar-cost averaging (DCA) is a great tactic.

What should investors buy? Well, that’s what Motley Fool is all about – helping Australians find the right investments for their portfolio.

I certainly think that exchange-traded funds (ETFs) can form the core part of the portfolio, with additional investments (such as ASX growth shares) being used for potentially stronger returns or extra diversification.

Some ASX ETFs I really like as a ‘core’ investment include Vanguard MSCI Index International Shares ETF (ASX: VGS) or VanEck MSCI International Quality ETF (ASX: QUAL) for global diversification. Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is my preferred pick for Australian investment exposure.

One thing I want to mention is that I avoid margin lending, CFDs and other financial instruments that significantly increase the risk of investing and could lead to a permanent loss of that capital if the bet goes wrong.

Watch compounding work its magic

Investing is great for building wealth because it can grow itself. If something returns an average of 10% per year, it can double in value after approximately eight years. It could then double again in another eight years. And so on.

Compounding is a very powerful force that helps our financial numbers get progressively bigger. The share market has proven it’s an incredible tool for wealth building, even if there’s some volatility along the way.

As Albert Einstein once supposedly said:

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.

Life doesn’t necessarily work out exactly like a spreadsheet, but I want to show how regularly investing certain dollar amounts could deliver a $1 million ASX share portfolio. Sometimes we may be able to invest more per month and sometimes it could be a bit less.

If someone invested $500 per month and it returned 10% per year, it would turn into $1 million in around 30 years.

Investing $1,000 per month at a 10% annual return would reach $1 million within 24 years.

Investing $2,500 per month with a 10% average return per year turns into a $1 million ASX share portfolio within 16 years.

Finally, investing an impressive $5,000 per month at an average return of 10% per year would become in less than 11 years.

So, what are you waiting for? Get saving and investing!

The post 3 steps to build a $1 million ASX share portfolio appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in VanEck Msci International Quality ETF and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.