Diversification is a pretty fundamental rule when it comes to investing. Rather than putting all your eggs in one basket – ie relying on the performance of just a few shares, spreading your investments around a bit can really help smooth out market ups and downs in the long run.

Investing’s pretty simple, really – you’re putting your money into assets with the aim of growing your wealth over time. Most people get into investing because they want to grow their wealth.

History shows this approach can be pretty effective. Even with major market disruptions like the Global Financial Crisis (2007–2009) and the COVID-19 pandemic, the Aussie share market has shown some serious long-term growth. The ASX 200 index went up by over 160% between 2000 and 2024, which is a pretty good indicator of what can happen if you stay diversified and invested over time.

Buying shares is usually where most people start investing, and you can choose from almost 2200 companies listed on the ASX.

Achieving that level of diversification is pretty straightforward with ASX Exchange Traded Funds (ETFs).

The thing with savings accounts or term deposits is that they provide a pretty stable income stream through interest payments and offer very high capital security. However, while they are safe and pretty easy to access, the typically lower returns on them make them pretty unsuitable for long-term wealth growth compared to investing.

What are ETFs?

Exchange Traded Funds (ETFs) are investment funds that hold a whole bunch of different assets – shares, bonds, property securities… the works. Investors can buy and sell units in these funds on the stock exchange just like they would with individual shares.

Because each ETF contains so many underlying investments, they can provide instant diversification even if you’re starting with a pretty modest amount. By owning units in an ETF that tracks a major index, you essentially own a stake in hundreds of companies, which further increases diversification.

Instead of trying to select and manage dozens of individual shares, investors can get exposure to a broad market or a specific sector through a single ETF.

Understanding Share Markets

Share markets – like the Australian Securities Exchange (ASX) – are the central hub for investing. They provide a platform for investors to buy and sell shares in publicly listed companies and give individuals the chance to participate in the growth and profits of some of the world’s leading businesses. For many investors, the share market is a key part of a diversified investment portfolio offering the potential for both long-term growth and regular income.

However, it’s worth remembering that investing in share markets carries some level of risk. Share prices can fluctuate for any number of reasons, including economic conditions, company performance and broader market trends. While the potential for growth is certainly there, there is also the possibility of losses, especially in periods of market volatility. That’s why successful investing requires a clear strategy, a long-term perspective and a willingness to seek professional advice when you need it.

Before you start investing its essential to assess your financial situation, risk tolerance and investment goals. Reading the product disclosure statement for any investment product is a really important step as it outlines all the risks, fees and conditions relating to the investment. A financial adviser can help you create a tailored investment plan that takes into account your objectives, risk appetite and time horizon, ensuring your portfolio is well diversified across different asset classes.

The share market offers a whole range of investment options from individual stocks to managed funds and exchange traded funds (ETFs). Each of these can play a role in helping you diversify your portfolio and manage risk. For example managed funds and ETFs allow you to access a broad range of companies and sectors, including Aussie companies, international markets and different industries like technology, healthcare and property. Bonds and other fixed income investments can also provide income and stability helping to balance out the more volatile elements of your portfolio.

It’s also worth keeping an eye on the regulatory environment. Services such as margin lending are regulated under the Australian credit licence and related entities like the Commonwealth Bank offer a variety of investment products including savings accounts and investment accounts. Make sure you understand the fees, charges and legal conditions before making any investment decisions.

Market conditions can change pretty quickly and the value of your investments may go up or down. Try not to let the temptation to panic sell in when things get a bit volatile – instead focus on your long term financial goals and keep a well diversified portfolio. Regular research and ongoing education are pretty essential for successful investing and professional advice can provide valuable guidance as you navigate the complexities of the financial markets.

Ultimately building wealth through investing in share markets is a long term process. By diversifying across a range of asset classes, regularly reviewing your investment strategy and seeking professional advice when you need it, you can help manage risk and work towards achieving your financial goals. Remember there are no guarantees in investing, but a thoughtful, informed approach can help you get the most out of the opportunities the share market has to offer.

How to Build a Diversified ETF Portfolio

While ETFs themselves are pretty diversified, combining several of them across different asset classes can give your portfolio an extra layer of protection against any one particular market or sector taking a tumble.

1: Picking Your Core Asset Classes

A diversified ETF portfolio usually has a mix of different types of assets, such as:

Australian shares – A lot of ASX-listed ETFs focus on the Aussie market. These can be a good option for getting franking credits, which can actually boost your after-tax returns if you’re one of those investors who benefits from them.

International shares – The Aussie market is pretty weighted towards banks, insurance and resources. Adding international ETFs can give you a slice of sectors that are a lot less represented locally – like tech and comms.

Fixed interest and government bonds – Bond ETFs can provide a bit of stability and help balance out a portfolio that’s otherwise pretty heavy on shares. They give you a regular income through interest payments but they can fall in value if interest rates go up or the issuer defaults. Bonds and bond ETFs provide a predictable income and are generally less volatile than shares but can be a bit sensitive to interest rate changes. When you’re looking at bond ETFs, it’s worth checking the product documentation – this will include the issue date, and this date is pretty key for understanding the timing and terms of the investment.

Property (REITs) – Real Estate Investment Trust (REIT) ETFs let you get in on the property market without having to buy actual real estate.

Investing is about choosing between defensive assets, which are lower risk and return, and growth assets, which are higher risk and return.

2: Deciding on Your Investment Allocation

How you split your funds across all these asset classes is largely down to:

• How much risk are you happy to take on?
• What’s your timeframe for investing?
• What are your financial goals?

Every investment carries some level of risk, and generally, the higher the potential return, the higher the risk.

For example:

• A growth-focused portfolio with a long time horizon might have a bigger chunk of Australian and international share ETFs.
• A more conservative portfolio might have a greater allocation to bonds and fixed interest ETFs to help reduce volatility.

Getting the right balance is pretty key to building a portfolio that suits your personal circumstances. Keep in mind that external factors like economic conditions and market dynamics can still affect the performance of your portfolio.

3: Reinvesting Distributions

ETFs typically pay out regular distributions from the dividends or interest earned by the underlying investments.

Reinvesting these distributions can really boost your long-term growth through the power of compounding, helping your portfolio grow a lot faster over time.

4: Rebalancing Your Portfolio

Over time, market movements can cause your portfolio to drift away from your original asset allocation.

For example, if share markets do well, your portfolio might become more heavily weighted towards equities than you originally intended.

Doing a periodic rebalancing – maybe once a year – just involves tweaking your holdings to bring your investment mix back in line with your original strategy.

Choosing the Right ETFs

With hundreds of ETFs available on the ASX, picking the right ones can be a daunting task.

The ASX publishes regular reports that outline all listed funds, their asset classes, unit prices and historical performance. While these resources are helpful, choosing the right ETFs still requires being pretty careful about your overall financial strategy.

This is where some expert guidance can really make a difference.

Building Your Investment Strategy with Expert Guidance

While ETFs can be a powerful tool for diversification, choosing the right mix of investments still requires a clear strategy that aligns with your goals, risk tolerance and timeframe.

Insight Wealth can help you design a diversified investment portfolio that’s tailored to your financial future, so we act in your best interests with the aim of providing you with accurate and transparent information.

Get in touch with us today, and we can discuss how ETFs and other investment strategies can form part of your long-term wealth plan.

Disclaimer: The information provided above is general advice only and doesn’t take into account your individual objectives, financial situation or needs.