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You’ve heard the buzz about passive investing, especially through ETFs, and you’re keen to explore how it could work for you. It’s often pitched as an easier route to growing your wealth, but how exactly do you get going, and what should you watch out for? Let’s look a little deeper.

What’s the Hype?

Think of passive investing as setting your financial cruise control. Instead of trying to actively pick winning stocks or time the market, you aim to mirror the performance of a broader index. It’s a more hands-off approach compared to active investing, where managers constantly buy and sell assets to try and beat the market.

The beauty of passive investing lies in its simplicity and cost-effectiveness. Because you’re not paying for a team of analysts to make stock picks, fees are typically lower. Plus, research often shows that, over the long run, many active managers struggle to consistently outperform the market anyway.

Getting Started

While it’s tempting to think you can simply pick any ETF, sit back, and watch the money roll in, there’s a bit more to it than that. Here’s a more detailed look at how to build a solid passive portfolio:

1. Define Your Financial Goals

What are you saving for? A house deposit, your kids’ education, or a comfortable retirement? Knowing your goals is the foundation of your investment strategy. It will influence the kinds of assets you invest in and the level of risk you’re willing to take.

2. Asset Allocation

Don’t put all your eggs in one basket. Spread your investments across different asset classes, like stocks, bonds, and property. Also, consider diversifying geographically, with both local and international exposure. This helps to reduce risk and improve your chances of achieving your goals.

3. Choose Your ETFs Wisely

ETFs are a popular way to implement a passive investment strategy. When selecting ETFs, look for ones with low expense ratios (the lower, the better), minimal tracking error (how closely it follows the index), and that track indexes relevant to your goals. Consider factors like the ETF’s liquidity (how easily you can buy or sell shares) and its tax efficiency.

4. Rebalance Periodically

Over time, your portfolio’s original asset allocation will drift due to market movements. Rebalancing involves buying and selling assets to bring your portfolio back to its target allocation. This helps you maintain your desired risk level and stay on track towards your goals.

5. Keep an Eye on Things

Even with a passive approach, it’s essential to review your portfolio periodically. The world changes, and your investment strategy might need to adapt. Keep an eye on market trends, economic developments, and any changes in your personal circumstances.

Things to Be Aware Of

• Index Quirks: Some indexes may be heavily weighted towards certain industries or companies. For example, the S&P/ASX 200 has a significant exposure to the banking and resources sectors. Be aware of these biases and consider whether they align with your investment objectives.
• Global vs. Local: While international diversification is generally a good thing, consider how much exposure you want to different regions and countries. A global ETF might not give you the specific local exposure you’re after.
• Bonds Can Be Tricky: Bond ETFs can be more complicated than they seem. Understand the underlying bonds in the index and the risks associated with them.

In a Nutshell

Passive investing through ETFs is a valuable tool for many investors, offering a simple and cost-effective way to build wealth. However, it’s not a completely hands-off approach. You still need to make informed decisions, understand the nuances of the market, and monitor your portfolio regularly.

It’s your money and your future, so invest the time to learn and understand what you’re investing in. And if you’re ever unsure, don’t hesitate to speak to us. We are just one email reply or a phone call away.