Creating a Portfolio with ETFs - Part II

Morningstar's team of investment consultants have created two all-ETF portfolio examples

Alanna Petroff 9 March, 2012 | 4:01PM
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In “Creating a Portfolio with ETFs – Part I” we introduced the fictional character Joe to a real-life independent financial adviser (IFA), Scott Taylor, to help Joe construct an all-ETF portfolio with £30,000. But what if Joe had less money to play with? What if Joe wanted to be more aggressive in his ETF investments?

In “Creating a Portfolio with ETFs – Part II”, we will explore other options for constructing ETF portfolios. Morningstar’s team of investment consultants have created two more portfolios for Joe. In the first scenario, we assume that Joe has £20,000 to invest. In the second scenario, we assume Joe has only £6,000 to invest. We also assume he is willing to take on more risk in these portfolios.

Below are Joe’s personal details and ideas for his new portfolios:

Joe:
- 42 years old
- Married
- Two kids
- Dog
- Paying down his mortgage
- He has a cash ISA with some savings, but no other investments
- He is rather financially stable and can pay off his debts each month

Joe has just received a surprise inheritance from a long lost uncle. After recovering from the shock, Joe decides he wants to create an investment portfolio for himself with this money. After reading Morningstar’s ETF articles, he decides he wants to invest it in ETFs.

£20,000 Example Portfolio

£6,000 Example Portfolio

Readers will see from the above portfolios that, if Joe chooses this kind of portfolio construction, he will be more heavily weighted towards equity ETFs, which is a more risky and aggressive approach compared to the portfolio in “Creating a Portfolio with ETFs – Part I.”

Readers will also see that, since Joe has less money to invest, he will want to consider buying fewer ETFs to avoid excessive trading charges. While diversification is important, avoiding trading charges is also very important. Joe may want to shop around to find a discount broker that offers low-cost trading to avoid sinking his money into transaction costs.

It is also important to remember that, if Joe wants access to the real estate and property markets, this is currently not possible using ETFs. If he wants exposure to the property markets, he could consider other kinds of funds or investing directly in real estate.

Every investor is different and these portfolios outlined above are merely examples. If you are looking to build an investment portfolio, Morningstar recommends you speak with a professional before making any investment decisions.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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