Zero to Hero: Building a Complete Portfolio with just ETFs

For many investors, the closest they get to a complete and diversified investment portfolio is their superannuation. While there’s nothing wrong with that – it’s a good thing to have a nest egg for retirement – making sure the investments you hold outside of superannuation are diversified and suit your goals can go a long way towards generating better financial outcomes.

The idea of building a portfolio can feel intimidating. After all, most superannuation portfolios are filled with 1000s of global equity names, bonds, managed funds, commodities. Then you might fear the costs to invest or the administration involved in managing a similar type of portfolio.

Where do even you start if you don’t have expert help?

Investing can be as simple or as complicated as you want it to be, and for those with very little or even nothing in the way of investments outside of superannuation, a complete portfolio could be a simple as a few carefully chosen ETFs. You can even set it up via your normal trading platform.

Planning to Build: Your Strategy

Before you get to the fun part of choosing investments, you’ll need to take a step back and consider your financial picture.

Some questions to start with:

What do you want to achieve with your investments?

Goals are important and help you stick to building your portfolio. Some might want to invest to grow money for a property in 10-15 years’ time, others might want to build something that will offer them extra income or perhaps you want to retire early (the FIRE movement).

What is your investment timeframe and what is your risk tolerance?

Investing is typically a long-term activity. If you only want to invest for a year or two, your finances might be better suited to low-risk assets classes like term deposits or high interest cash accounts. The length of time you can invest also partially influences your risk tolerance. A timeframe of 10-15 years allows you more time to recover from losses than 5-7 years for example. Your risk tolerance (ability to manage losses in your portfolio) is also influenced by your finances and your personal feelings about loss.

What is your budget for investing and how frequently could you make extra contributions into your portfolio?

Many investment platforms have a minimum investment value for new trades of $500. Knowing what you have to start with and how frequently you can add money to the portfolio will influence the shape of your portfolio and what you can invest in. Regular contributions can help build your portfolio over time. Don’t forget to consider that there are management fees associated with investments and your returns will be impacted by these.

These questions should start to give you a picture of what type of investment bucket you might sit in and will shift the types of asset allocations you might want to make.

Passive Investing: the Core-Satellite Approach

There are a range of approaches to portfolio construction, but a common one which ETF specialists advocate for is called core-satellite investing.

In this strategy, the “core” of your portfolio is dedicated via passive exposures to major asset classes, like equities or fixed interest. The choice of investments remains largely static and aside from rebalancing to meet your asset allocation framework from time to time, won’t change dramatically. The core allocation tends to represent a larger part of a portfolio, ranging from 65-85%.

Then you use “satellite” investments opportunistically for particular outcomes, values or to express a view you have on market activity. In some cases, these investments might be shorter term, or they could be higher risk.

An example of a satellite investment could be if you had a strong view on the prospects of AI and wanted to invest further in this. You might add an ETF that specifically invests in the AI supply chain to add that more targeted exposure. Allocations to satellite investments are usually a much smaller portion of your portfolio and could be 15-35% in total.

Asset Allocations for Core Portfolios

There are a range of calculators online to help you determine the right asset allocations for your portfolio based on your goals and finances. Some examples of these are AMP’s Investment Risk Profiler tool or the smartasset Asset Allocation Calculator.

Visiting most industry superannuation funds can give you a reasonable framework for asset allocations based on the type of portfolio you are seeking to create.

As a basic framework, these are some common portfolio types that you could consider to plan out the core of your portfolio.

1. Growth portfolio

Investors are targeting to grow their investment value and might have a longer time horizon and ability to take on risk. A diversified portfolio in this instance will largely be allocated towards growth assets like equities and might have smaller exposures to other asset classes.

A sample asset allocation: 90% Growth Assets, 10% Defensive Assets,

2. Balanced portfolio

These investors still want to grow their investments but are also concerned about protecting their money. They can take on some level of risk and while still tilted towards growth assets, will have more of a balance of investments.

A sample asset allocation: 75% Growth Assets, 25% Defensive Assets,

3. Conservative or Defensive portfolio

These investors still need a level of growth to manage inflation and other challenges but have less ability or desire to take on risk. The focus is on preserving their capital. There is a greater use of defensive assets to manage market cycles in this type of portfolio.

A sample asset allocation: 40% Growth Assets, 60% Defensive Assets,

Choosing Investments for the Asset Allocation

Once you’ve chosen your asset allocation, you’ll need to break it into types of assets so you can select which investments to use.

Growth assets typically include equities, property, commodities and private equity.

Defensive assets typically include fixed income, cash, infrastructure, gold, some private credit and cash.

A very simple portfolio might use Australian and International equities for the growth portion of the portfolio, and Australian and International fixed income for defensive investing. Many fund managers also advocate for holding an allocation to gold in a diversified balanced portfolio as a portfolio hedge against market uncertainty. You might choose one broad-based passive index to cover each asset class – the idea is that this will give you diversification across the asset class easily and at a lower cost than individually buying shares or using actively managed options.

In practise for a Balanced Portfolio, this might look like:

GROWTH - Size of allocation is 75%

Australian Equities - 40% - Examples Global X Australia 300 ETF (ASX: A300) | Global X S&P/ASX 200 High Dividend ETF (ASX: ZYAU)
International equities - 35% - Examples Betashares Diversified All Growth ETF (ASX: DHHF) | Betashares Nasdaq 100 ETF (ASX: NDQ)

DEFENSIVE - Size of allocation is 25%

Australian fixed income - 10% - Examples Betashares Australian Composite Bond ETF (ASX: OZBD)
International fixed income - 10% - Examples Global X USD High Yield Bond (Currency Hedged) ETF (ASX: USHY)
Gold - 5% - Examples Global X Physical Gold (ASX: GOLD)

You’ll note that the sample funds mentioned are passive index trackers. There’s nothing to stop you from using actively managed ETFs, like JP Morgan Global Bond Active ETF (Managed Fund) (CBOE: JPGB) as an international fixed income allocation. If one suits your goals better, just remember to factor the management fees might be higher on these.

While the portfolio above suggests 5 ETF asset allocations, if your goals and level of risk were particularly aggressive, this might even truncate down to 2-3 ETFs, covering Australian and international equities with a small gold allocation.

You can use satellite investments outside of the core portfolio to offer extra support to your goals or to factor market views or beliefs. For example, if you needed your investments to deliver income, you might use a targeted income fund like the JPMorgan Equity Premium Income Active ETF (Managed Fund) (ASX: JEPI). Or if you had a strong view on the prospects of Bitcoin, you might add an allocation using something like Global X Bitcoin ETF (ASX: EBTC). If you don’t want to include satellite investments, you don’t need to, but it can be a useful option to add different exposures without drastically changing the core of your portfolio.

Making Habits Stick: Regular Investing Plans

While passive investments do take some administrative pressure off, there’s no true set and forget strategy for an investment portfolio – unless you want to hire an expert to manage it for you.

You’ll need to revisit your portfolio regularly to make sure the asset allocations largely hold (you may need to rebalance otherwise) and creating a Regular Investing Plan where you top up your investments on a regular basis is an important part of helping your portfolio grow to ensure you meet your goals faster. It can also smoothen out some of the costs of investing as it means you haven’t bought your whole portfolio at one point in time.

It’s also important to revisit your goals to ensure your portfolio is meeting them on a regular basis – at least annually is worthwhile. If you can see you might not meet your goals, you may need to revisit your time frame for meeting the goals, reprioritise which of your goals to focus on or consider whether you need to adjust your asset allocations differently.

The Final Portfolio

There’s a reason why ETFs have been so popular with investors – ease, diversification and generally lower management costs. It makes them a great option to consider if you want to build a diversified portfolio outside of superannuation and you can add in direct shares, actively managed funds or other options in your satellite allocations as you choose.

Bear in mind that there are no guarantees in investment markets and it can be hard to match your goals and financial circumstances to the right investment strategy. Seeking expert advice can be valuable and of course, it doesn’t stop you from still using a portfolio of lower cost instruments like passive ETFs, it might simply offer you a more refined strategy to get to your goals.

Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.