People are often surprised at how much of my total investments are in Exchange Traded Funds (ETFs). The assumption is that because I am an active long-term investor and short-term derivative and ETF trader I likely have few if any ETFs outside of a tax-free account.
But this is not the case. Just over 50% of my investments are in ETFs and I am increasing this to around 60% over the next couple of years.
I consider 50% of a portfolio in ETFs to be the absolute minimum. The reasoning is simple. The biggest risk to my portfolio is not some rating agency or a foot-in-mouth politician – it is me.
Benjamin Graham, author of The Intelligent Investor, summed it up best when he said, “The investor’s chief problem and even his worst enemy is likely to be himself”.
The risk is I buy the wrong share (done that); hold onto a bad share for far too long (done that); miss new trends (done that). The list of personal investment risks goes on. A core selection of ETFs also gives me instant diversification across asset classes and geographies. For example, I know little about selecting property ETFs so I just buy the CoreShares SA Property Income ETF (share code: CSPROP) and I get the largest property stocks. Want US exposure? Buy the S&P500.
By putting 50% of my portfolio into general market ETFs, I remove myself from the process ensuring that at least half my portfolio will generate market returns that will, over time, beat inflation and create wealth.
For a newbie to the stock market 100% should go into ETFs with the first R36k every year going straight into a tax-free account. In fact, most South Africans should stick with 100% in ETFs and create wealth over time.
When your confidence grows and you already have a large pile of ETFs, you can start down the road of individual share investing. But do so cautiously always remembering to top up your ETF investments to keep this part of your portfolio at least 50%.
If you decide to only invest in ETFs, that’s perfectly fine and likely you’ll be richer for that decision as you’ll never own a dog of a share that’ll cost you money.
The bottom line is that ETFs should form the core of every portfolio with a minimum of 50% regardless of the investor’s knowledge and experience.