How to build a (multi) million-dollar portfolio with ETFs
While it has become somewhat of a meme and investing trope that the first million is the hardest to make, there's no doubt that it is true.
In fact, the advisers featured in this episode say it can take 35 years, but you have to invest $740 a month, every month, at a 6% annual compound rate. For those with a little less spare cash (or just starting out on their investing journey), a $53 investment every week into an ASX index fund could turn into just over a million dollars in 40 years.
But that's not to say Australia isn't flush with millionaires already. According to research from Praemium, there were over 635,000 millionaires in Australia in 2021, climbing from 488,000 the year prior. Meanwhile, the Australian's annual Rich List found there are 131 billionaires in our country.
So in this thematic episode, Livewire's Ally Selby was joined by Shaw and Partners' Felicity Thomas and Pivot Wealth's Ben Nash for their thoughts on building (multi) million-dollar portfolios with ETFs.
Plus, they also share the biggest mistake they are seeing in client portfolios right now.
Note: This episode of Buy Hold Sell was shot on Wednesday 13th April 2022. You can watch the video, read an edited transcript or listen to the podcast below.
Ally Selby: Hello, and welcome to Livewire's Buy, Hold, Sell. I'm Ally Selby. And today, we're going to figure out how you can get rich without having to die trying. Exchange-traded funds or ETFs are a great way for investors to get exposure to equities and other asset classes without the risk that comes with investing in a single stock. So, To find out how you can build your multimillion-dollar portfolio and the ETFs that advisers recommend to do so, we're joined by Felicity Thomas from Shaw and Partners and Ben Nash from Pivot Wealth.
First up, we're going to talk about buzzwords. Transitory was definitely the buzzword of 2021, but this year I've been hearing a lot of the word volatile. Ben, I might start on you. How can ETFs help investors through this volatile period?
Ben Nash: These days, there are so many options out there when it comes to ETFs. Different sectors, thematics, and niches allow investors to choose the areas that they feel are able to balance the volatility within their portfolios. The wide array of choices gives investors more control and they're just getting more and more accessible and more and more cost-effective as well.
Ally Selby: Over to your Felicity. Do you agree, is there any other way that ETFs can help investors through this volatile period?
Felicity Thomas: You said it in your intro, right: It allows people to buy a single position and get diversification across different asset classes. I also like the fact that you can get access to bond portfolios, bond ETFs, as well as physical gold that you usually wouldn't be able to get with a $5,000 investment, while they're usually about $250 for a bond portfolio.
Ally Selby: Equity markets typically would return around 7% to 8% per anum on average. With inflation and rising interest rates, what can investors expect?
Felicity Thomas: Inflation isn't necessarily a bad thing or something scary. You hear on the news, inflation, it's scary, negative, negative, negative. It actually means that the economy is growing. So, that's why I think that we shouldn't be too scared of it. The only other thing that I want to add is we're now seeing a bit of stagnation. So we're moving more from financials to materials.
Ally Selby: Ben, over to you. We're moving into this new market regime, as Felicity said there. What kind of average returns can investors expect from index-like products?
Ben Nash: Choosing or forecasting investment returns over a short term investment horizon is always fraught with danger, but history has shown us that time tends to de-risk all risks. So clearly, it's going to have an impact on markets, companies, and the economy in the shorter term, but over the medium to longer term, it's likely that impact will be temporary. And markets will remain around that 7% to 8% mark that you mentioned.
Ally Selby: They say the first million is the hardest to make. And don't I know that. Ben, how much do investors need to invest and for how long to build a million-dollar portfolio?
Ben Nash: Well, it depends on the time period over which you want to do that, but I was just doing some numbers off the back of us chatting a little bit before firing this up and you can save and invest as little as $53 a week investing into just the share market average, a nice ASX index fund, or even a diversified index fund or something like that. That will turn into just a bit over a million dollars in a 40-year timeline. Obviously, the more that you invest, the shorter you can make that time period, but it's all possible for just a few bucks every day really.
Ally Selby: Is there a number in your mind, Felicity, that people can invest to make a million dollars?
Felicity Thomas: That's a really good point. So say you're 30 – I wish I was still 30 – I could invest $740 a month every month for 35 years at a 6% annual compound return. And in 35 years, I'd have a million dollars.
Ally Selby: For those starting out, are there any growth ETFs you would recommend to really get those compound returns going?
Felicity Thomas: Yes, definitely. But you need to have a high appetite for risk. The ETF that I was thinking of is ETFS Ultra Long NASDAQ 100 ETF (ASX: LNAS). Now, obviously, in the last year, it's down slightly compared to the NASDAQ 100. However, if you actually invested since inception, which is 2020, you'd be up about 28% versus the NASDAQ's 13%. So yes, you get a lot more risk, so you need to be able to cope with the downside as well, but long term investor, right?
Ally Selby: Yeah. Over to you, Ben. Is there a growth ETF that you recommend for those investors starting out on their journey?
Ben Nash: Yeah. I like the Vanguard Diversified High Growth ETF (ASX: VDHG). It's 35% Australian index, 55% international index, 10% defensive. Rock-solid. Because it is a diversified index fund, it rebalances automatically for you. So, I don't really believe in the set and forget investments, but this one is something close to that. It'll do a bit of the work for you. It's got a great yield, reasonably low cost, and you can sleep like a baby at night, knowing that you're just going to get the market returns over time.
Ally Selby: There may be a few viewers out there who already have a million-dollar investment portfolio. Ben, is there a more defensive growth ETF that you think they could use?
Ben Nash: Yeah, I think sticking with the Vanguard theme, I like the Vanguard High Yield Index Fund (ASX: VHY). It's an Australian index, which is weighted to companies that pay higher dividend yields. The long term yield on that is a bit over 6%, which is really solid, got a high degree of ranking. So nice and tax-effective. I wouldn't call it a defensive ETF in that it is essentially 100% growth investments. But because Australian companies are really reluctant to muck around with their dividend policy, the yield protects you while you might see some capital fluctuations. You've got a nice, solid yield, nice income-producing investment over time. So it's a win for me.
Ally Selby: Felicity, over to you. For more experienced investors, is there an ETF that you would recommend that's a little bit more defensive?
Felicity Thomas: That's actually quite funny that you say that. I was actually going to say the Vanguard Diversified Growth ETF (ASX: VDGR) for my million dollar portfolio because I like that it's diversified. It's got that 70/30 split, Australian equities, international equities, fixed income, bonds, as well as emerging markets and the return is about 8% to 9% per annum.
Ally Selby: Felicity, last one for you today. What's the biggest mistake that you're seeing in clients' portfolios at the moment, particularly when they're trying to build up their wealth?
Felicity Thomas: Honestly, it is panic selling. People freak out and they see the market drop a little bit and just want to sell and get into cash. And then they never know when to get back in. They're trying to time the market. It's just not possible. No one can time the market. I don't think anyone has been able to time the market on every single instance. So honestly, panic selling and not keeping to your long term strategy.
Ally Selby: What do you recommend to those investors that are trying to time the market or who are panic selling right now?
Felicity Thomas: Don't look at your portfolio. Just don't. You don't need to look at it every day. If you've got a good diversified ETF or a bundle of different ETFs, you don't need to look at it. Take the long route. Check it once a year.
Ally Selby: Over to you, Ben. Is there a major issue that you're seeing in investors' portfolios when they're trying to grow their wealth and what do you often suggest to them to solve that problem?
Ben Nash: I completely agree with Felicity there. The panic selling is a bit of an issue. I'd say that just as much of an issue, especially for younger people that are still building and accumulating wealth is not understanding their investments well enough to be as aggressive as they probably should. So, when people don't understand where the risks are coming from in the investments that they do have, and then how they can manage those risks, that means that they can be a bit fearful when there are the market volatility conditions that we're seeing at the moment. Whereas when you take the time to educate yourself and understand those risks, have a good risk management strategy in place, that means when you see some of the volatility like we're seeing at the moment, or the bigger volatility that we saw in the middle of COVID, you feel really confident to push hard and then you get to reap the rewards of that.
Ally Selby: Well, I hope you enjoyed that ETF special of Buy, Hold, Sell. If you did, why not give it a like. Remember to subscribe to our YouTube channel. We're adding new content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.