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Are ETFs a viable one-stop share shop?

I have been someone who has bought shares on a hunch or following reading an article in a newspaper and I have done okay but not better than the best super fund managers. However, my costs are less, especially in those years when I don’t do much buying and selling. However, I saw you talking about ETFs and am thinking about selling all of my stocks and just buying an ETF that gives me the returns from the S&P/ASX 200. What are the pros and cons with that strategy?

If you have been an active trader and you’re not impressed with your results, it’s sensible to be objective about it. Personally, I like the ETFs or exchange traded funds as it gives you a broader exposure and reduces the potential risks of being exposed to one firm or share.

However, don’t forget about diversification and rebalancing your portfolio. These are the tasks that good financial advisers help their client with and is an area where a lot of DIY investors who run their super funds make mistakes.

You see, you should work out your risk profile. Say you come up with the view that you want 70 per cent in shares, 20 per cent in fixed deposits and 10 per cent in cash, you have to keep track of your investments’ performances to ensure that you maintain this balance. If shares rocket along like they did from March 2009, the overall increase in share prices might have meant you would need to sell some shares and put more money into fixed deposits and cash to maintain the 70-20-10 asset allocation.

That’s the theory of sound financial planning and that’s why reliance on ETFs alone could create some issues to consider. An ETF that replicates the S&P/ASX 200 does give you exposure to many sectors and that’s good for diversification but it might leave you too exposed to mining and financial stocks, which make up a very big chunk of the S&P/ASX 200 index.

I could imagine someone using a range of ETFs that might capture resource share price movements, financial, dividend paying and defensive stocks, as well as some foreign exposure. These ETFs do help you bring down your costs of investing but you must make sure you don’t pursue cost savings at the expense of good guidance and sensible investment strategy.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, May 28, 2010

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