The road to wealth is more than simply identifying a few popular shares. Building a diversified portfolio can reduce risk and increase overall long-term returns. Many Australian investors use ASX ETFs because they provide broad market coverage in a low-cost and simple way.
A wider choice of assets, sectors, and geographically diversified holdings is more attainable as well. Here are some ways that an investor can construct a diversified portfolio with ASX ETFs.
Begin with a Broad Market EFT
A good foundation is to have a broad market ETF that comprises many of Australia’s biggest companies. The investor gets exposure to industries and retail through a single investment. You don’t need to buy tens of shares to have exposure to dozens of companies.
This strategy significantly minimizes the risks posed by a single poor-performing company and allows you to benefit from the long-term trends of the Australian market. Beginners will find broad market ETFs practical to establish their portfolio and not be required to monitor holdings continually.
Offset Risk with Sector ETFs
Sector ETFs allow you to invest your money into different industry groups, which you believe will have strong growth opportunities. Common sector ETFs include technology, healthcare, infrastructure, and energy. However, these funds should only complement a broadly diversified core investment portfolio, as higher risk exposure will increase both gains and losses.
Investors seeking greater returns may look towards a geared product. When targeting an Australian Gear ETF for amplified market exposure, it’s wise to work closely with an expert. A specialist manager in Australian equities will share meaningful insights, leading to a desirable investment outcome.
Increase International Market Exposure
It may be limiting to hold only Australian shares and nothing else, due to the Australian share market being heavy on financial services and mining stocks. By holding international ETFs, the investors can achieve better diversification within their portfolio. An International ETF may expose the investor to technology, manufacturing, healthcare, and consumer brands from overseas markets.
It may also offset some of the risks when the Australian economy experiences a downturn, if the market continues to perform well. Foreign ETFs are generally held in major economies, such as the United States, Europe, and Asian developing markets.
Currency diversification is also another benefit when you buy international ETFs. With a lower Australian dollar, it may be beneficial when you convert back to local currency as the earnings from your overseas investment increase.
Hold Various Asset Classes
Apart from shares, investors should hold various asset classes such as bonds, property, and commodities in their portfolios, and balance the returns between all the asset classes. This will not only provide better diversification but will also minimize risk when markets perform poorly. Bond ETFs generally offer less risk than stocks as they tend to be less volatile.
A property ETF will enable investors to gain exposure to commercial, industrial, and shopping complexes without directly owning them. Some investors keep small amounts, like a certain percentage of their total holdings of gold or commodities, to mitigate risks during times of uncertainty. Through diversification across multiple classes, investors have greater flexibility in managing their overall portfolios.
Periodically Rebalance Your Portfolio
While diversity adds benefit to a portfolio, it is also important that the portfolio is reviewed, maintained, and rebalanced periodically. It keeps the original target asset allocation from deviating, and the portfolio remains efficient throughout the period.
Over time, the initial asset allocation may change if one sector of a diversified portfolio outperforms. By rebalancing, one will be able to sell part of the overperforming asset class and move into an underperforming asset class. This helps the investor to stay disciplined and meet the financial goals.
Endnote
ASX ETFs help in constructing a cost-effective diversified portfolio. Hold a mix of Australian shares, international markets, and asset classes, along with a regular rebalancing regime. It will strengthen the risk management of investments and long-term goals of investors.
