ETFs have made investing much more accessible. There are hundreds to choose from in Australia, covering everything from Australian and global shares to specific industries and investment themes.
That’s a good thing. But with so many options, it’s easy to get caught up in the next investment idea.
You see an ETF that interests you, buy it, then move on to the next one. Before long, you’ve built up a collection of investments, but you’re not entirely sure how they all fit together.
I see this quite often. People have investments they’ve bought over the years, but when you ask why they own each one, they can’t always give you a clear answer.
The question isn’t how many ETFs you own. It’s why you own them in the first place.
Are you building a portfolio or collecting investments?
One of the common issues I see is what’s sometimes called a collector’s portfolio.
You buy an investment because it looks interesting. Maybe you’ve read about a company, heard about a new ETF or seen something that’s performed well. You add it to your portfolio, even though you might already own something quite similar.
There’s nothing wrong with being interested in investing or learning about new opportunities. But over time, you can end up with a collection of investments without a clear plan behind them.
This is where your investment purpose matters.
Are you building wealth over the next 20 or 30 years? Are you investing to generate income? Do you want to retire early? Or will you need access to some of this money in the next five years?
These are different goals, and they can lead to different investment decisions.
Start by working out what you want your money to achieve. Then you can build a portfolio around that, rather than trying to make a collection of investments work together after the fact.
Different ETFs can hold the same companies
Let’s say you own a global shares ETF, a US shares ETF and a technology ETF.
They sound like three different investments. But have you looked at what’s actually inside each fund?
Some of the world’s largest companies appear across multiple indices and ETFs. You could end up holding the same companies through several different funds without realising it.
That means adding another ETF doesn’t necessarily give you more diversification. You might simply be increasing your exposure to companies you already own.
This isn’t automatically a problem. You might deliberately want greater exposure to a particular market or sector. The important thing is understanding what you’re buying and why.
Don’t assume that a different ETF name means a different investment exposure. Have a look at the underlying holdings and how they fit with the rest of your portfolio.
What does diversification actually look like?
Diversification is about spreading your investments across different assets, markets, companies and sources of risk.
But I often see people with lots of investments who aren’t as diversified as they think they are.
You could own shares in 20 different companies, but if they’re all exposed to the same industry, you might still be taking on a lot of similar risks.
The same applies to ETFs. You could own five different funds and still have a large chunk of your money invested in the same companies or sectors.
Diversification can also mean looking beyond shares. Holding Australian shares and international shares gives you exposure to different markets. Adding defensive assets, such as bonds or cash, can change how your portfolio behaves. Other assets may also have a role, depending on your goals and circumstances.
The point isn’t to own a bit of everything. It’s to understand the risks you’re taking and avoid concentrating too much of your money in places you might not realise.
Start with your asset allocation, not your next ETF
Before deciding which ETFs to buy, think about your overall asset allocation.
How much of your portfolio should be invested in growth assets, such as shares and property? How much should be in defensive assets, such as cash and fixed interest?
That depends on what you’re working towards, when you’ll need the money, your willingness to take risk and your financial capacity to do so.
Once you’ve worked that out, you can decide which investments make sense.
ETFs are one way to build a portfolio, but they’re the tools, not the strategy.
It’s also worth looking at your whole financial position rather than just your share portfolio. Your home, any investment property, your super and other investments all contribute to the overall picture.
You might have a portfolio that looks diversified on its own, but when you consider everything you own, you could be more exposed to certain assets or risks than you thought.
Before you buy another ETF, ask yourself these questions
There’s no magic number of ETFs that every investor should own. A portfolio can be built with a small number of broad funds, while other investors may have good reasons for holding more.
Before adding another ETF, ask yourself:
- What am I trying to achieve? Does this investment support the goals I’ve set for my money?
- What does it add? Does it give me exposure I don’t already have, or am I buying more of the same companies?
- Does it fit my asset allocation? Am I building the portfolio I need, or changing direction because something has caught my attention?
- Why am I buying it now? Does it have a clear role in my portfolio, or has it simply performed well recently?
It’s easy to get caught up in new investment ideas, particularly when there’s plenty of information out there about the latest ETF, company or market trend.
But every additional holding needs to make sense within your overall plan.
If you can’t explain why you own an investment or what it adds to your portfolio, it might be worth taking a step back before buying more.
A simpler portfolio can be a better one
Building an investment portfolio doesn’t have to be complicated.
In fact, a simple portfolio that you understand and can manage over the long term may be more useful than a complicated one that requires constant decisions.
More holdings don’t automatically lead to better outcomes. And you don’t need to act on every new investment idea you come across.
Start with your goals, work out the level of risk that makes sense for you, then build a portfolio to support those goals.
You might find another ETF adds something useful. You might find you already own what you need.
Either way, it’s worth understanding what you own before adding more.
For more on ETFs, diversification and portfolio construction, you can hear me discuss these topics with Owen on The Australian Investors Podcast. If you’re looking for financial advice, you can find out more about Rask Advice.
