Hi noobs! It has been another long break between posts, I apologise for my tardiness however please be calmed by the fact I have been continuing my journey of financial independence uninterrupted as I hope you are too!
Today I would like to talk about having a balanced portfolio. Up until recently I thought that this meant I would have some gold stocks and some industrial stocks and some health care stocks with most being off the ASX 200 and maybe some exposure to the US Market with a few choice stock picks from the S&P 500. That is a balanced portfolio right? Well it is if you want to be 100% equities leveraged, but even then, where is the exposure to Europe? or maybe Japan? or the emerging markets of Brazil, India, China and Russia?
I have changed tact lately in my way of thinking about what constitutes having a balanced portfolio. I would like to have exposure to ALL of these markets if I can within my portfolio, but how is this easily achievable for an individual investor? Well now it is through the ever increasing ease of purchasing Exchange Traded Funds (ETFs).
EXCHANGE TRADED FUNDS (ETFs)
So what exactly are ETFs? Well the ASX website sums it up nicely (they refer to ETPs which is simply an umbrella term for an ETF);
Exchange-traded products are financial products traded on an exchange that invest in or give exposure to securities (shares) or other assets such as commodities. Most ETPs generally seek to track the performance of a specified index or benchmark (such as the S&P/ASX 200 index) or a currency such as the USD or a commodity such as gold.
These are funds which contain assets (in our case stocks) which track the chosen index as closely as possible. They normally comprise of blue chip stocks which make up the majority of the chosen indicie (and thus influence its behaviour). So for my example above if I wanted to have some exposure to say Japan in my portfolio I could purchase an ETF which was mainly comprised of Japanese stocks, I can purchase these straight off the ASX (or any major international exchange) and viola, I have exposure to Japan. In this example one I am watching for you Aussie investors is IJP – iShares MSCI Japan ETF, available for $13.50 currently via the ASX.
In this case the Japanese index we are looking to track is the MSCI
The MSCI Japan Index is designed to measure the performance of the large and mid cap
segments of the Japanese market. With 320 constituents, the index covers approximately
85% of the free float-adjusted market capitalization in Japan.
This is simply one example of using an ETF to open your eyes to exposures you probably haven’t even thought about. There are hundreds of options available tracking everything from indexes to currencies to emerging commodities. If you want an in depth look at what is available this is simply one fund manager (iShares) who offer ETFs – iShares ETFs
The other way we can access diverse markets, in this case property, via funds is with A-REITs;
AUSTRALIAN REAL ESTATE INVESTMENT TRUSTS (A-REITs)
Where ETFs give us exposure to foreign stocks and indicie tracking, A-REITS give us exposure to the Australian Property Market without the large up front capital required to actually buy property. There are many different types of trust too, residential, retail (large shopping centre trusts), Industrial (warehouses, factories), Office (large office buildings), Leisure (Hotels, Theme Parks) and Diversified. All of these give the average investor a chance to have exposure to one or more of these types of residential or commercial properties without the tons of capital which would be required.
Investors profit from rental income via dividends and also from capital growth of the property through increases in the capital value of the units held within the A-REIT, just the same as owning stock.
As with ETFs, A-REITs are obtainable on the ASX as simple as buying stocks. An example is CPA – Commonwealth Property Office Fund, which gives investors exposure to the Australian Office market.
So there you have it, two great ways you can diversify your portfolio giving yourself exposure to the Australian Property Market and also to overseas stock markets all with the ease of buying ETF and A-REIT units via your broker on the ASX. With these great options available to us we can easily give ourselves 5% exposure to Japan, 10% exposure to property (maybe office and retail), 12% exposure to Europe’s blue chip stocks or maybe the Nasdaq or S&P500 in the US etc etc The options are limitless so do not limit your exposure to just Australia, you might miss the next great market boom in one of these other countries.
As always noobs do your own research and discuss any financial decisions with a qualified financial advisor. Happy New Year