As inflation and market volatility continue to dominate headlines, many Aussies are turning to exchange-traded funds (ETFs) as a way to invest their money more strategically. But how can you ensure you're making the most of this investment approach?
Amy Marnie
This article was created in partnership with Betashares, helping Australians build their wealth for over a decade.
Is now a good time to invest your money? It's the question that has plagued investors since, well, forever – and with good reason.
The share market is a fickle beast, prone to sudden swings and unexpected drops. During bullish periods, investors can flood the market in feverish mania, driving prices up. This can make entering the market expensive. On the flip side, during a 'bear market', values drop, and it's safe to say it's not a happy time for many investors. If you're starting your investing journey, holding onto cash and waiting for things to turn around might be tempting.
But wait too long to enter investing, and you might miss out on the opportunity to take advantage of future growth and the compounding effect. Compound earnings mean that any returns you earn are reinvested to earn additional returns. And the earlier you start investing, the more benefit you gain from compounding.
The earlier you start investing, the more benefit you gain from compounding.
When shares fall in value, you may be able to take advantage of lower prices of companies compared to their intrinsic worth. Given the share market tends to follow cycles of contraction and growth, you could see significant gains when the market eventually recovers. There's always a possibility that a downturn could continue for an extended period. But history shows the share market consistently trends upwards over the long term.
So what does this all mean? Whether we are experiencing a 'bear' or a 'bull' market, investing should be based on your financial goals, risk tolerance and circ*mstances. Here are five signs you're ready.
YOU HAVE AN EMERGENCY FUND
Investing always comes with risk, and you don't want to be forced to sell your investments at a loss just because you need some cash in an emergency. That's why having an emergency fund in place is essential before you start investing. Pay your bills first, ensure you’re not carrying a consumer debt and build a financial cushion that will soften the blow if you lose your ability to work
A general rule of thumb is to have at least three months of expenses in savings as an emergency fund before starting to invest. When your emergency fund is complete, redirect what you put aside into investments.
YOU UNDERSTAND THE VALUE OF DIVERSIFICATION
Diversification is key to any successful investment strategy, and exchange-traded funds (ETFs) are an excellent tool for achieving it. ETFs offer instant diversification via exposure to a broad range of asset classes and sectors, helping to spread your risk and potentially reduce volatility.
For example, the Betashares Australia 200 ETF (ASX: A200) tracks the performance of the largest 200 companies listed on the Australian stock exchange, while the BetasharesNASDAQ 100 ETF(ASX: NDQ) provides exposure to some of the most innovative and revolutionary companies in the US technology sector. By investing in these ETFs, you can gain exposure to a diversified portfolio of shares without the need to purchase and manage individual shares themselves. ETFs are mostly passive investments, meaning they aim to replicate the performance of a particular index or market segment (before fees and costs).
Compared to the thrills of investing in individual shares or with active fund managers (that aim to beat the market), investing in ETFs could be called ‘boring’, but it can cushion the inevitable swings of the share market. If one emerging company tanks, at least there are other investments offering buoyancy.
Plus, ETFs typically have lower management fees than actively managed funds.
YOU’RE NOT RELYING ON THE MONEY FOR THE SHORT-TERM
Younger people can generally afford to take more risks because they have many working years ahead. If the market takes a big tumble, their portfolio has time to recover. Still, investing is not a get-rich-quick scheme. It requires patience, discipline, and a long-term perspective. The next few years will probably be a bumpy ride, so it pays to hold your nerve. You need a time frame of at least five years, ideally far longer.
Savings for short-term money goals like an overseas holiday, wedding plans or a new car may be better placed in a low-risk, high-interest savings account.
YOU’RE CONSUMER DEBT-FREE
It’s generally not advisable to start investing if you carry consumer debt, such as credit cards, buy-now-pay-later balances, or personal loans. These can be expensive forms of debt, so paying them down as quickly as possible is crucial.
'Consumer debt is the most expensive form of debt, so paying it down as quickly as possible is crucial.'
If you have long-term debts like a mortgage or higher-education loan, which typically come with lower interest rates, it may be possible to invest while still making regular payments towards these loans. So long as you can comfortably afford to make your long-term debt payments and have additional funds available for investing, you can consider building your investment portfolio to secure long-term wealth.
YOU'RE COMFORTABLE WITH RISK
It's important to remember that it’s impossible to predict the share market, and investing always comes with risk. When you invest money, you risk losing all of it. The Australian share market tumbled around 50 per cent over the course of the GFC (from 2007 to 2009). If you lost most of your savings, how would you react?
Start small and learn as you go. With the right preparation and a willingness to weather the ups and downs of the market, you can start building your investment portfolio to secure those big financial goals.
Betashares Capital Limited (ABN 78 139 566 868 AFSL 341181) (Betashares) is the issuer of the Betashares Funds. Before making an investment decision, read the relevant Product Disclosure Statement and Target Market Determination, available from this website (www.betashares.com.au) or by calling 1300 487 577, and consider whether the product is right for you. This information is general in nature and doesn’t take into account any person’s financial objectives, situation or needs. You should consider its appropriateness taking into account such factors and seek professional financial advice.
Investments in Betashares Funds are subject to investment risk and the value of units may go up and down. The performance of any Betashares Fund is not guaranteed by Betashares or any other person.
Betasharesis a leading Australian manager of ETFs. With more than $25 billion under management and the broadest range of ETFs on the market, we currently serve over 800,000 investors. Betashares ETFs offer a convenient, cost-effective way to gain exposure to a wide range of asset classes, including Australian shares, global shares, bonds and commodities.
