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Starting an ETF portfolio

Discussion in 'Exchange Traded Funds (ETF)' started by Compleks, 7th Mar, 2008.

  1. Compleks

    Compleks Well-Known Member

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    Hey guys.
    I've been thinking lately about the next step in my investment strategy, and ETF's seem to be looking good at this stage.

    I currently am invested only in managed funds, which have declined in value more than 33% since I first invested (almost 1 year ago I think). I have 3 manged funds (1 geared Aus. share fund, 1 Aus. Property fund, and 1 geared global property fund). The original plan was to also add an International share fund, but I've been hesitant to do so due to market conditions and my current track record.

    Anyway, I've been considering ETF's as my next step. But I'm not sure what I need to consider in setting up a well balanced portfolio.

    What asset classes should I consider?
    What sort of split (percentage based) should I be looking at?

    Initially I thought that shares and property were my only real options, but I've been hearing more about commodities and resources etc...
    I just want to have a plan before I go buying randomly.

    I have about $5000 to play with (which was originally going to be used to enter my 4th and final fund).

    Thanks guys.
     
  2. Glebe

    Glebe Well-Known Member

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    From memory (couple of years ago), I remember Travis Morien's website having lots of good info on asset classes and diversification.
     
  3. Compleks

    Compleks Well-Known Member

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    Travis Morien's Investment FAQ - A primer on asset allocation

    I've bookmarked this for future reading. Is that the article you were talking about?

    Has anyone got any examples or comments in relation to ETF's?

    My managed fund plan was to invest equally in four funds (Australian shares/property & International shares/property). I still plan to follow through with that, but I'm going to wait a while before investing in an International Share fund.

    In the meantime I was wondering if anyone could give me some examples of a well structured ETF portfolio, and what asset classes I should be considering. I'm planning for a long term investment (10years or more) and hope to make contributions when I can afford to.
     
  4. venger0

    venger0 Active Member

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    Hi Compleks :)

    I've only just started with ETFs. But can try and summarise what i have read and have based my decisions based on the following:
    1) diversify across 5-7 funds (maybe your 4 will do? not sure)

    2) for an example of ETF-based portfolio, have a look at Glebe's alternative (see dkmc's rejigging portfolio thread). I like the thread coz it has a lot of great discussion building up to the portfolio - so you can discern the reasons and issues to be considered when making up yours. The portfolio that i have built is based on this. I have altered the percent's to match my preference and circumstance.

    3) the recent 'dip' in the markets proved to be a dip across the board. ie, don't count on getting negative correlation from international shares or LPTs. I think dkmc had direct residential property in his portfolio and this has been the only asset class to go against the dip... the other could be commodities?!

    One thing: have you considered index funds? for regular small purchases, they may be more cost effective.

    The other thing: someone else here will probably bring it up if i don't ;) get some pro advice from a fee-based financial planner. I did - and while it didn't add a great deal to my ideas - it helped re-affirmed them. If nothing, an FP will help you consider other issues that you may have missed out - insurance, tax, accounting structures, etc.
     
  5. dkmc

    dkmc Well-Known Member

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    One way to do it is to go to ifa.com and complete the risk questionaire to determine your risk . They will then recommend a portfolio based on that with a lot of back data, and volatility data. Then try and replicate that asset allocation in australia.

    You really have to think about your current portolio too and whether it meets your goals. Geared property and geared austr funds - your lucky to be only down 33%. How much gearing do those funds have? are you comfortable with it. How big are the fee's. Do you have access to line of credit?

    If you havent read Travis' faq and presentations then thats the first spot to go.
    Presentations page
    spend an hour or 2 reading throught the ppt files

    The fee's are too much for 5k of investment. You are better off with vanguard and drip feeding in
     
  6. Compleks

    Compleks Well-Known Member

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    Thanks for the help guys. I've been doing a little reading and alot more procrastinating.

    "The fee's are too much for 5k of investment. You are better off with vanguard and drip feeding in"
    Could you explain what you mean by that?

    I completed the risk management survey on the IFA website. They suggested a preliminary portfolio of Sea Green: Index Funds Advisors - Portfolio 50 - Index Returns and Allocations

    I know I need to get my ass into gear, but I'm feeling very overwhelmed with information.
     
  7. samaka

    samaka Well-Known Member

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    Just go buy 5K worth of IOO - nice passive global share ETF.
     
  8. dkmc

    dkmc Well-Known Member

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    Well if you buy ETF's It costs around $30 to buy
    If you have a diversified portfolio of say 6 ETFs than thats 30*6 just to enter
    which is 3.6% - too expensive, remember if you sell its another 3.6% so you need to make 7.2% just to be even

    Hence if you have small amount and want to stay diversified then vanguard will allow you to be in at <0.8%, and diversified across markets

    Are you going to get rid of your current portfolio and start from scratch?
     
  9. samaka

    samaka Well-Known Member

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    This is what you could do:

    Sign up with Macquarie Prime so it's only $20. The trading platform is linked to a cash account which earns the RBA cash rate - so 7.25% at the moment.

    Put your current savings in there and have your wage paid into it - so straight away you're earning 7.25%. If you want to add in say $5000 lots then when you've saved $5020 buy in.

    Doing this you've lost $20 of $5020 - which is 0.40% to enter. Because it's an ETF - not a fund you pick the entrance point - you're not a day behind the eightball.

    Plus in-action is still earning you 7.25%
     
  10. Compleks

    Compleks Well-Known Member

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    Thanks. That gives me something to think about.

    dkmc. I plan to hold my current portfolio and let it run it's course. I figured I invested for the long term, so I will leave it and see what happens. I don't think I will be making any contributions anytime soon though.

    I would rather put my money somewhere else and learn a different form of investing.

    I had a look at the Vanguard site, but couldn't really work out how they operate. Can anyone give me a rough explanation?



    - Does Macquarie Prime have any additional charges? This sounds like a pretty good idea.
    How much control do I have investing through Vanguard and Macquarie Prime?

    I have roughly 8 to 10 thousand I'm willing to invest. I want to invest passively, and don't mind having my money tied up for 10+ years.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    What specifically don't you understand ? They are just another fund manager - like CFS and such ... their index funds work exactly like all other managed funds (issue units, pay distributions etc).

    The difference with an index fund is that rather than actively picking stocks and timing the investments that they hold - they just buy to match their selected index - minimum work, minimum costs and you get pretty close to what the market does overall.
     
  12. Compleks

    Compleks Well-Known Member

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    Thanks Sim, that's pretty much what I was after.
     
  13. Compleks

    Compleks Well-Known Member

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    My investment learning disability is kicking in again. I'm not normally this thick, but for some reason the topic of investing is just really hard for me to understand.

    Do managers like Vanguard and Macquarie limit the funds you can access?
    (Macquarie seems to allow you to invest in all shares etc... but from what I can tell Vanguard only offers specific investment products/funds. Am I correct?)

    What would be the advantage of using a fund manager, as opposed to investing through Westpac Broking?

    Thanks guys, I know I'm getting repetitive now, but my brain just doesn't seem to have an investment section.
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Most fund managers have a fixed set of funds (the ones they manage themselves!) that they let you invest in. Eg. NavraInvest have 3 funds that they manage, Vanguard have a few more than this. There is no portfolio management offered by most fund managers - you just invest in the fund(s) you choose and they send you statements etc.

    At the other end of the spectrum are wrap providers who give you a selection of funds to invest in and they provide administration and portfolio management services to make things easier at tax time. Wrap providers generally don't manage funds themselves - rather they make it easier for you to invest in a range of funds managed by the fund managers.

    In the "grey area" between individual fund managers and wrap accounts are the fund managers like CFS and Perpetual who set themselves up as portfolio managers - where you can invest in a range of funds via the same investment account (not strictly a wrap account - but similar), with consolidated reporting and management. CFS and Perpetual let you invest both in their own funds, plus in funds managed by other fund managers, but accessed through the CFS/Perpetual products. There is still a limit to the number of funds you can invest in - CFS have something like 200 funds available.

    I'm not exactly sure what you would use Westpac Broking for - but I'm guessing they are essentially a "discount funds provider" like InvestSmart or CommSec Funds etc ... these guys just act as a clearing house for managed funds and typically offer rebates on entry fees for retail funds so that you can invest more cheaply. These guys make their money from the trailing commission they will receive from the fund managers if you invest through them.

    Here's the summary:

    1. you can invest directly through a fund manager (eg Vanguard, Macquarie, CFS, NavraInvest, etc), but you may pay entrance fees and you have to do all the paperwork yourself

    2. you can invest via a discount fund broker (eg InvestSmart, YourShare, Commsec Funds, etc) to avoid the entrance fees, but you still end up investing directly with the fund managers and doing all the paperwork yourself

    3. you can invest via what I call a "semi-wrap" provider (eg CFS or Perpetual) to get access to all of their funds, plus third party funds which they resell - you will still have entrance fees, but will have less paperwork since the funds are managed through the one service. You can also usually use discount providers like in 2 to avoid the entrance fees.

    4. you can invest via a wrap account, which costs extra, but provides access to a wider range of funds and provides portfolio and administrative services and possibly access to wholesale funds for retail investment amounts

    Unless you want to use a wrap account to help with administration, most people investing on their own will go with option 2 to avoid the entrance fees.

    Note that I am only referring to Managed Funds here ... ETFs are not managed funds - they are exchange traded funds ... you don't go via a fund manager, rather you go via a sharemarket broker (like Commsec) to invest in these products ... exactly the same as if you were investing in shares like BHP or Woolworths.
     
  15. Compleks

    Compleks Well-Known Member

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    Thanks Sim, you're always extremely helpful.

    I invested in my managed funds through CFS, using InvestSmart as my discount broker. I found the process was fairly easy, and I like the ease of management through the CFS web site.

    Is there any advantage to investing in ETF's through a pllatform like Macquarie?

    I was thinking of investing in some ETF's, to give me some more experiance. My managed funds have not been doing well (I invested right before everything turned sour). They have started to turnaround lately though, but I would still like to try and broaden my knowledge/portfolio.

    I had a look at the Macquarie site, and it's looks like a good platform. Does anyone have any experience investing through Macquarie Prime?
     
  16. DaveA

    DaveA Well-Known Member

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    I invest through prime... i love it but has 2 distinct downfalls...

    cant trade options (i heard they are trying to implement something late this year), and you cant use managed funds on it. Its a shares only style margin loan.... however you mass well buy STW and get 95% lending (but geared to like 50-60%) on it which will beat almost any managed fund....
     
  17. Rod_WA

    Rod_WA Well-Known Member

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    I spoke to MQ Prime a few months ago, and they are currently working on setting up a Managed Funds section, to complement the Cash, Shares & CFD sections. I don't know what the allowable gearing will be, but I'm certain it will be nowhere near the 95% they offer on the ASX50.
     
  18. Compleks

    Compleks Well-Known Member

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    So, if I were just interested in investing in some ETF's, would it be worth while signing up to Macquarie Prime?
    I don't really plan on using any margin loans at this time. Are there any other reasons why I would invest through Macquarie?
     
  19. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    If you just want to buy some ETFs and don't care about margin now (you can always do it later) ... all you need is a stock broker. Any of the online brokers should do the job - Commsec, etc.
     
  20. Compleks

    Compleks Well-Known Member

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    Cool, thanks again everyone.

    Now I need to figure out what I want/need in my portfolio.