Building Your Portfolio – selecting different types of investments

When you are just starting out on your investment journey, the plethora of options available can seem overwhelming. Should you invest locally or globally? Buy shares on a Bell Direct trading account or through a managed fund? And what should you do to keep your investment plan on course?

If you have made the decision to transition from being a saver to an investor, it is important to be armed with the knowledge to make the right decisions for you. But life is complicated enough, so we have broken down the options to help you get started.

Types of investment

While there are a broad range of investment options to choose from, the two favoured by first-time investors are individual shares (companies such as BHP) and exchange-traded funds (ETFs).

Buying individual shares can give you a clear idea of what you own, provide control over what you invest in and can help you to keep investment costs down. There are no yearly management fees involved in holding a portfolio of Australian shares that you have selected yourself.

However, individual shares can have different levels of volatility or risk, which means some companies’ share prices fluctuate more than others. –For example, an established company with a successful business with a history of stable cash flows like CBA is less risky than a mining exploration company that may not find what they are looking for.

For this reason, if you are planning to buy individual shares, it’s important to build a diversified portfolio incorporating a number of companies across different market sectors (or industries) and geographies (or countries).

The second option favoured by first-time investors, ETFs, are managed funds that are bought and sold on a stock exchange, and which typically invest in a basket of shares that track an index such as the ASX200 which represents the 200 largest companies on the Australian Stock Exchange. A well-known index that tracks 500 of the largest companies listed on the New York Stock Exchange is the S&P500.

ETFs provide several layers of investment portfolio diversification, such as:

• Market and geographic diversification: For example, Vanguard (a fund manager based in the US) has an ETF that tracks the performance of 20 global developed markets including the US, Japan, UK, France and Canada. In one ASX trade investors can access over 1,500 companies. The largest companies include Apple, Microsoft, Facebook, VISA, Johnson & Johnson and Nestle. The ASX code is VGS.
• Sector diversification: The global technology sector, for instance, is one of the fastest growing sectors globally. There are only a handful of technology stocks available on the Australian market, meaning investors need to look globally to access this theme. BetaShares (an Australian fund manager) has an ETF that tracks the performance of 100 global technology stocks. Investors can buy this ETF on the ASX and the ASX code is NDQ. NDQ’s largest holdings include Apple, Amazon, Alphabet, Intel and Cisco Systems.
• Asset class diversification: ASX research has shown that three out of four share owners only hold domestic shares. Considering the Australian market represents less than 3% of the world’s investable assets, local investors are missing out on diversification opportunities globally. ETFs provide easy access to international shares, domestic and international bonds, property and cash markets. For example, we can build the core of a portfolio with five iShares ETFs.

It is important to remember that ETFs come with a management cost. The yearly management fee for the above portfolio is 0.12%which means the portfolio will cost you $12 in fees for every $10,000 you invest each year.

Of course, you do not need to choose either direct shares or ETFs. In fact many investors elect to include a mixture of both in their portfolios. A popular way to construct a portfolio is to use a core and satellite method. Investors can build a core with ETFs then add direct stocks as their market confidence and knowledge grows.

Measuring portfolio performance

You will feel much more informed and confident in your decision-making if you look at your investments periodically and track your portfolio’s performance.

For each investment you have, you will receive regular transaction statements showing the value of your investments, along with details of any dividend payments and the fees and taxes you have paid. Keep these in a safe place you can easily refer to them at tax time. You can also track how you are going by looking at your portfolio holdings on your Bell Direct investment account.

Portfolio Performance 

The chart shows the performance of cash, Australian shares and the iShares growth portfolio over five years from March 2015 to March 2020.

The benchmarks shown are provided for illustrative purposes, so that you may compare the performance of the selected portfolio with the performance of commonly used benchmarks.

Summary

 As you get to understand the investment options a little better, the next step in your educational journey is to delve more deeply into the individual asset classes you can invest in. This educational series will then cover the importance of tuning out the market noise and help you to revisit your investment goals as your circumstances change.

Top three take outs

• For beginner investors, individual shares and ETFs are the most favoured and straight-forward investment options
• Think beyond just investing domestically – there is a whole world of opportunity available!
• With just a handful of trades, you can build a fully diversified core portfolio with ETFs – with direct shares added for further diversification as you become more confident

Important Disclaimer- This information is for educational purposes only and is of a general nature. It has been prepared without consideration of your specific financial situation, particular needs and investment objectives. This information does not constitute financial advice and you should consider your own financial circumstances in assessing the appropriateness of this information.