Slow and Steady Wealth Accumulation for the Win

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Build wealth steadily with ASX investing: choose quality, diversified investments and use dollar-cost averaging to avoid risky tips and market timing.

John BeveridgeSenior Editor/Journalist · 4 min readIn briefAt-a-glance3 takeaways

• 01Build wealth steadily; avoid tips and high-risk schemes.
• 02Use quality, diversified, low-cost ETFs.
• 03Automate regular buys to curb emotion and market timing.

One of the most frustrating things about knowing a thing or two about investment is that so many people are willing to put their trust in a random “tip” from someone at a barbecue or some spammy email or, worse still, a phone call from a boiler room.

The media both online and mainstream is literally littered with hard luck stories from people who have been scammed or lost their shirts from this sort of “investment” advice but still people persist in thinking that they are just one important “tip” away from making their fortune and joining the wealthy elite.

It seems to be some sort of Tattslotto syndrome that persists despite all of the evidence being that the best way to get rich is to do so slowly and systematically.

Lowering Investment Stress

To use a few good examples, I’ll show how getting rich slowly can be a much lower stress and easier method than jumping from one high risk scheme to the other.

An early tip is to concentrate on building up a stock of high-quality investments.

One of the most common misconceptions many people have is that you just put money “in” to the share or property markets and let that market do the work.

What that ignores is that these markets are just like any other market – they exist to facilitate transactions but it is entirely up to you whether you buy high or low quality investments from them.

There are ways to “buy” the quality end of these markets but it is important to know what you are buying and why.

After all, you wouldn’t go to a fruit and vegetable market and just buy half rotten pumpkins – you would want to get a variety of produce based on what you need and you also pick the best quality you can find at a good price.

For a start, using the share market as an example, you can easily get a broad and low-cost exchange traded fund covering the top 200 companies that trade on the ASX, using an exchange traded fund.

That gives you broad diversification across the 200 largest listed companies, and I recently showed how to expand that approach and invest across global markets as well here.

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Apply an Automated System

Other than finding the best quality and diversification you can buy, it is also a great idea to implement an investment system to automate your investments and remove the human emotions from the process.

One of the best ways to do this is to use dollar-cost averaging – buying automatically and regularly using money that you have decided to invest every week or month.

There are many advantages to dollar-cost averaging but the main one is that you are investing at regular intervals no matter what is happening on the market.

Over time you will have bought at highs, at other times lows, but you are not trying to time the market which makes the average price you pay more reasonable.

It also avoids the emotional buying and selling reactions that happen when markets hit new highs or fall to new lows.

Some trading apps, brokers and even ETF providers allow you to set up regular investing plans even for relatively small amounts and once it is established you can set and forget, only checking how you are going occasionally.

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Compounding Returns Key

With such a systematic approach it is almost unbelievable how quickly the investment sums can add up over time, particularly when the effect of reinvested dividends and compounding start to work for you.

Compounding returns are the hidden secret in most successful investor’s arsenal and they are fairly simple to achieve.

In the case of a high interest savings account, for example, by leaving your interest returns in the account there is a bigger amount to earn interest on for the next month and every month after that.

It is a similar situation for shares or property investment—if you can afford to leave, reinvest or pay down debt with your dividends or returns then the amount you have earning a return continues to compound over time.

Over longer periods of time, this compounding can really start to matter.

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Ride the Rising Yield

In terms of the yield being earned on your investment, that is also often rising steadily.

If you want to see a great example of this, just imagine investing in Commonwealth Bank (ASX: CBA) shares a decade ago.

Over that time your effective dividend yield on your original investment will have climbed above 10% a year and then kept on rising.

If you had also reinvested those dividends into more CBA shares, the overall returns would be amazing.

Of course, not all shares perform like the Commonwealth Bank has.

However, even with a slower rate of capital growth, dividend yields will tend to rise over time as a percentage of the original purchase price.

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Long-Term Horizon

Earning interest on interest and returns on returns is really a secret formula for long term wealth creation.

Getting rich slowly may seem much more boring than taking a punt on a speculative company that somebody told you about at a barbecue but it is much more likely to produce higher returns in the long run.

And the interesting thing is that as your portfolio grows you can invest some money in more speculative investments.

Although, by then you will be smart enough only to risk a very small portion of your funds and research your investments to ensure that the potential reward is commensurate with the risk of losing your capital.

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John Beveridge

Senior Editor/JournalistView all articles

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