Diversification is key when it comes to creating an investment portfolio.
Despite the temporary, sudden downturns caused by the 2007-2009 global financial crisis and the 2020-2021 COVID pandemic, the value of the ASX increased by more than 160% between 2000 and 2024, as evidenced by the growth in the ASX 200 market index. This demonstrates that it’s better to invest in a variety of shares rather than sticking to just a few.
You can create your own extremely diversified share portfolio by investing in ASX Exchange Traded Funds (ETFs). Even if your starting investment amount is relatively small, ETFs will deliver a level of diversification that would be impossible if you invested in individual listed companies.
What are ETFs?
ETFs are investment funds that own a basket of assets, such as shares or government bonds, using money from a pool of investors who can buy and sell units in the fund on a stock exchange.
How to create your diversified investment in ASX ETFs
Although individual ETFs are by their very nature already diversified, you can widen your spread even more, and therefore reduce your risk exposure, by investing in a range of ETFs that concentrate on different asset classes. This means you’ll need to choose your core asset classes, allocate your funds accordingly, and ideally be prepared to let compounding work its magic and also adjust your portfolio when necessary.
- Choose your core asset classes
Although some ASX ETFs might confine themselves to investing in Australian shares, thus maximising the benefits of franking credits, others will focus on international shares. Market sectors such as IT and communications are under-represented on the ASX, which is heavy in banking, insurance and resources companies, so some exposure to international shares will create a better balance.
You may also want to consider ETFs that invest in government bonds and fixed interest, for greater stability, or in REITs (Real Estate Investment Trusts).
- Decide how to allocate your investment
How you apportion your funds across a range of ETFs will depend on how much risk you are willing to take to grow the value of your portfolio, and how long you are prepared to stay in the market.
A long-term, growth-focused, high-risk tolerance portfolio might be heavily weighted in favour of Australian and international shares. A more conservative approach would favour fixed interest and government bond ETFs.
- Reinvest
Although there will be some peaks and troughs, your ETF portfolio is more likely to demonstrate moderate, steady growth over time. You can increase the rate of growth by reinvesting in ETFs any fund distributions you receive.
- Rebalance
Once in a while – perhaps yearly – you may need to revisit your allocation of investment types to maintain the balance in your original plan. This involves buying or selling some units in ETF asset classes that have drifted away from your preferred percentage allocation.
How to select appropriate ETFs
The ASX publishes a monthly report listing all funds traded on the ASX by the category of the asset type each of them invests in, along with the latest unit prices and historical percentage returns on investment. There are currently 700 funds listed, and it can be difficult to know which ones to choose. However, a financial adviser will be able to give you information and guidance about ETFs suited to your particular investment needs.
