HOME DEPOSIT

fication and very low fees. Instead of buying stocks in one company, ETFs track a market index, meaning they buy stocks in all the companies. They give you direct exposure to a wide range of investments in their asset class, such as Australian shares, international shares, bonds, property or metals. Better still, they can be easily bought and sold like shares on the stock exchange.

A good diversification strategy reduces the risk of losing money and at the same time boosts your opportunity to make a decent return. Diversifying means combining different types of investments to lower the risk of one doing badly and impacting overall returns.

Investing in ETFs can be a great way to have low fees and diversify at the same time. A single investment in an ETF gives you access to shares in thousands of companies within an index, such as Apple and Google, or BHP, Woolworths and Westfield, so you don’t have to worry about picking the wrong stock. With the right range of different ETFs, you can have a well-diversified portfolio of shares, bonds and commodities to reduce risk and generate returns.

At the end of the day this all means more money for your house deposit.

BALANCE RISK AND RETURN

You’ll first need to consider your investment profile, which is a combination of two things: how long you plan to invest to achieve your goal (for example, a house deposit) and how willing you are to accept market movements in your share portfolio.

For many people saving for a house is a three- to five-year plan. So you need to invest in a portfolio that strikes the right balance between risk and returns to achieve balanced growth over that time.

Finding the right balance in your portfolio is the trickiest part for investors. A rule of thumb we use for clients is that your portfolio should have a 90% or better chance of a positive return over your planned investment period based on historical returns and risk (that is, giving you the best chance of reaching your goal).

The emergence of digital investment companies and fund managers such as Stockspot in the past three years has made it easier and more affordable for investors to access professional portfolio management to build a diversified holding. Stockspot builds ETF portfolios based on a number of personal variables such as your financial goals, cash flow and capacity for risk. It takes the hassle and guesswork out of investing while keeping costs low.

You don’t require a huge deposit to get started, which is not the case with most traditional advisers. Many of our investors start with less than $10,000 and are saving for a house.

PORTFOLIO’S CORE ASSET

Australian share ETFs make up about a quarter of the total ETF funds listed on the ASX. Australian shares are a core asset in all Stockspot’s portfolios, ranging between 15% to 50% of the overall allocation. Australian ETFs let you participate in the long-term growth of the economy and access the tax benefits of franking credits.

In our portfolios we have chosen the Vanguard Australian Shares fund (ASX: VAS), which tracks the S&P ASX 300 Index of Australia’s largest 300 companies for a tiny fee of 0.15% a year.

CUSHION AGAINST FALLS

Bonds tend to move in the opposite direction to shares, which is why they are often described as a defensive asset. They provide the padding for when the market falls. Having bonds in your portfolio helps keep it on a steady track, balancing out dips in the market.

Bond ETFs include a portfolio of many bonds within an index. The most commonly used bond index in Australia is the Bloomberg AusBond Composite. It invests in investment-grade bonds issued by the treasury, state governments and companies. The iShares Core Composite Bond ETF (IAF) tracks this index and is part of the portfolio we recommend to all clients to help cushion against market falls.

By combining Australian ETF shares and bonds in a portfolio, you can give yourself a better chance of reaching your goal of buying a house.

IDEAL COMBINATION

All our portfolios hold five ETF asset classes: a mix of Australian shares, bonds, global shares, emerging market shares and gold. The purpose of an investment portfolio is to maximise returns against a comfortable level of risk. We believe five ETF asset classes provide the best possible combination of returns, risk and costs.

Higher returns with lower risk is the magic of diversification when compared with buying individual shares. The five ETFs we own tend to move in different directions, smoothing out market peaks and troughs. Investing in a well-balanced portfolio of ETFs will make your investment journey towards a house deposit less stressful and easier to watch.