Chapter 8: Why you need a plan to invest in Exchange Traded Funds

Investing is an undoubtedly important step in everyone’s financial journey through life. It allows us to take control of the money we work so hard for, and get it working for us.

Whether it’s building up funds for your children’s education, getting a head start on saving for retirement, or trying to build some passive income, investing can serve a wide range of purposes.

Often, new investors try to imitate the strategies that other people implement. You may find yourself in a discussion with a friend or colleague who has invested and naturally you are inclined to try and learn from them – which is perfectly normal given you know and trust them.

Unfortunately, this strategy doesn’t work well. Investors need an individually tailored plan to help them meet their objectives.

Found this chapter outside of The Ultimate Guide to ETFs? Check out the full guide!

What should I invest in?

The concept of investing is simple: you hand over your hard-earned money, and after a period of time it grows in value or produces an income (or both).

For most people, the first question is ‘what type of investment should I have?’. You may be thinking about ETFs, shares, managed funds, property, term deposits or bonds. While each of these investments have their pros and cons, this actually shouldn’t be the first thing you are considering. Your first port of call should be ‘why am I investing’ as we covered in Chapter One.

Each type of investment has its own characteristics that make it more or less suitable for certain goals. For example, investing in property has some high upfront costs such as stamp duty which may make it an unsuitable place to invest funds you anticipate accessing in 12 months.

On the other hand, a term deposit is inexpensive which is great in the shorter term but won’t provide a very high return, meaning it may not be the best way to build wealth.

So, what factors will determine what I should invest in based on my goals?

Risk profiles, investment timeframes, liquidity, and return

Let’s explore some important concepts:

  • Risk profile: a measurement of how much risk is appropriate based on your personal circumstances and your attitude towards risk.;
  • Investment timeframes: when will you need the money back? Is this for a car purchase or to help fund retirement?
  • Liquidity: if you did need to access your funds, how hard would that be? Would there be costs? Would it be worth it?
  • Return: what you should expect to earn, whether through growth or income.

All of the above are important considerations that are affected by your end goal and are inter-connected. That is, you need to make trade-offs because in the investment world you can’t have your cake and eat it too. In the investment world the saying goes that “there are no free lunches”. If there are, beware and avoid them.

The more ‘aggressive’ you are as an investor the more exposure you may have to growth assets such as property or shares which historically have a healthy return on investment but also come with higher risk. The less ‘aggressive’ you are the more exposure you may have to defensive assets such as bonds or term deposits which may have a lower return on investment however are fairly stable and usually considered a safe way to preserve your capital. It is also worth noting that in ordinary economic conditions, inflation will slowly devalue savings in your bank. Investing helps to protect against this.

It is vital to your success as an investor that you have a good grasp of your risk profile, your investment time frames, your liquidity requirements and the return required to achieve your objective.

MythBusters

Let’s run through a few common mistake’s investors make:

  • Selling an investment when it goes down in value – this is probably the most common mistake new investors make. If you purchase an investment such as shares in a company, and then they reduce in value, selling them only means solidifying your losses. Depending on the circumstances there may be cause to exit from your position however, selling purely because it went down in value is the wrong thing to do. This is when having a licensed investment specialist on-call can help you make the right decision;
  • Paying high fees – when investing on your own, you can become particularly vulnerable to this as it is difficult to determine if the benefits you receive are worth the fees you are paying;
  • ‘Timing’ the market – looking back throughout history, markets tend to perform well over longer periods of time. Granted, there are upticks in the market and sadly this causes people to believe there are ways to predict these movements. Unfortunately, it simply isn’t true and the odds are heavily stacked against you. There’s an old saying: “time in the market over timing the market”.

Having an expert in your corner

With all of that in mind, the first thing you need to do is sit down and determine what your end goal or goals are – where do you want this money to be, and when?

Once you know what it is you are looking to achieve, the next best thing you can do is speak with a qualified financial adviser. They will guide you to ensure you make better, more informed choices from the myriad of options. This will help you to get your investments to where you want them to be in the future whilst making sure you don’t make avoidable mistakes.

A successful investment plan, designed and prepared by a qualified financial adviser, will help get you from where you are, to where you want to be – just like following a GPS. The good news is, it costs less than you think – they don’t all drive Maserati’s.

And don’t forget, financial planning is about how you want your money to work for you, and what is most important in your life.

Find out more about how ETFs can be used throughout your lifetime in the previous chapter.

Head back to the Ultimate Guide to ETFs

If you’re comparing Online Share Trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to the company’s website. The information displayed is based on an average of 6 trades per month. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of Online Share Trading companies.


About Aaron Williamson

Aaron Williamson bio picture Aaron is a qualified financial adviser with Fiduciary Advice who studied law with a specialisation in tax and superannuation. Having completed the Diploma and Advanced Diploma of Financial Services, Aaron quickly grew a large client base providing financial advice to retail clients and went on to manage and grow a team of advisers. Aaron now heads up the Client Services department at Fiduciary Advice and is heavily involved in the digital delivery of their advice product.

This article was reviewed by our Content Producer Isabella Shoard before it was published as part of our fact-checking process.

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