Financial freedom with ETFs - investing for beginners (2024)

As you move through life, financial planning can become critical to meet your changing needs and goals.

The return on your investments can be used toward many financial goals, whether it be buying a home, starting a business, providing for children or grandchildren, building wealth for retirement, or simply seeking more financial freedom or financial independence.

It’s never too late to become an investor.

Here are some pros and cons of getting started investing earlier in life.

The first step is to be clear on your goals – why do you want to invest?

Some of the most common reasons people want to invest can be largely categorised as time-based, such as to grow wealth or for retirement, or goal-based, such as buying a property.

Learnhow to set your investment goalsand your strategy including thecore-satellite strategyapproach to portfolio construction.

When thinking about getting started investing, it’s crucial to next ask the questions:

• What is my investment timeframe?
• What does this mean for my risk profile and tolerance?

Your investment timeframe may determine the asset types or asset classes you invest in, as each has its own risk and return characteristics.

If you’re starting earlier in life, you may prefer to invest more in higher risk/higher return assets, known as growth assets. If you’re investing later in life, you may prefer to invest more in lower risk/lower return assets, known as defensive assets.

Learn more abouttypes of investments and asset classes.

Determining your risk profile and investment timeframe will help with the next step, which is to decide the asset allocation for your investment portfolio.

Try ourPortfolio Builder tool, which gives you the option of selecting a pre-constructed hypothetical portfolio of BetaShares funds based on a selected risk profile, or building a tailored hypothetical portfolio to better suit your financial goals by adjusting the weightings, or adding or removing funds.

Diversification is an investment strategy that lowers your investment portfolio’s risk.

You can diversify by investing your money across differentasset classes – such as shares or equities, cash, property and fixed income. You can also diversify across the different options within each asset class.

For example, within equities, you could consider diversifying by investing in sharemarkets in different regions and in a range of industry sectors.

If you diversify your investments, if some fall in value, others may rise and balance out the fall overall across your investment portfolio.

Sometimes, people can become overwhelmed when considering how to begin, and procrastination holds them back. However, the longer you wait, the more you are giving up your greatest asset – time.

Investing can be thought of as the intersection of your goals, your investment timeframe and the different investment types available. Once you’ve determined these, simply getting started with investing is all it takes to put your plan into motion.

This is one of the most common questions people ask when considering getting started with investing.

The beauty of starting your investment journey with ETFs is that there is no minimum investment – subject to any requirements applied by the broker you choose.

This means you could buy as little as one ETF unit on the ASX. However, with brokerage costs – which can be around $20 a trade – investors may prefer to buy ETF investments in somewhat larger chunks.

What is ‘timing the market’ and does it work?

Market timing is an investing strategy whereby an investor tries to identify the best times to enter the market and when to get out, based on predicted market highs or lows.

Attempting to time the market is a common preoccupation for investors starting investing, or deciding to deploy more cash into the market.

However, history suggests that it is almost impossible to consistently time the market over the long term. Ultimately, more time in the market could give you the best chance of steadily accumulating and benefiting from compound returns.

For a long-term investor, the decision should be about time in the market rather than timing the market.

One way to build the discipline of investing regularly over time is dollar cost averaging – a strategy of making regular incremental investments rather than one-off lump sums trying to find the right time to invest or on an ad hoc basis when you have the savings.

Learn more aboutdollar cost averaging.

Not only is time your best asset when you’re investing, but you’ll also reap the benefits of compounding — a phenomenon Albert Einstein coined “the eighth wonder of the world.”

Compounding is a fundamental component of wealth creation, and by understanding the principle, you can make a significant difference to your financial independence over the long term.

In a nutshell, compounding means that your money makes money. And then you make more money on the money your money makes.

Here’s a simple hypothetical example of how it works:

If you invest $1,000 this year, and you earn a 10% return on that money over the year, that means you make $100 on your original $1,000 investment, and, as a result, you end up with $1,100.

Even if you don’t invest any more money next year – your dollar returns will increase, assuming the same percentage return. How?

Assuming the same 10% return on your $1,100 account balance in the following year, instead of $100, you will earn $110 because you’re getting that 10% on a larger balance. At the end of year 2, you would have $1,210.

When comparing one ETF to another, or comparing ETFs to other investments, it’s always a good idea to understand how ETF fees work.

ETFs, like all managed funds, charge management fees. However, ETFs can be a more cost-effective option, as most ETFs are passive investments with lower management fees compared to the fees charged by traditional managed funds that have an active investment strategy.

Learn aboutETF management fees.

Learn more aboutpassive ETFsandactive ETFsandthe difference between the two.

1. Understand why you’re investing and consider your time horizon and financial goals
2. Choose your investment strategy based on your time horizon and financial goals
3. Choose the asset classes or types of investments based on your goals
4. Choose the weighting or allocation of your asset classes or types of investments to build a portfolio, e.g. Australian or international shares within equities
5. Choose the ETFs to gain exposure to your asset class or type of investment
6. Invest regularly, e.g. practise dollar cost averaging

Investing helps you to grow your money for the future.

The key thing to remember is that while portfolios may need to be adjusted periodically based on life changes, the focus should remain on the long term.