6 minutes reading time
When it comes to building wealth, there’s no magic formula – but three key principles can significantly assist in helping you reach your wealth goals: keeping costs low, diversifying effectively, and harnessing the power of compounding. Think of them as the ‘trifecta’ of smarter investing.
Each principle serves a distinct purpose, but together, they create a powerful synergy, helping you build a resilient portfolio that works for you without constant oversight.
In this article, we’ll explore how these pillars work in practice—and how platforms like Betashares Direct can make it easier to apply them through features like zero brokerage, automated investing, and diversified portfolios.
1. Lower costs: The key to maximising returns
Fees are critical because they can have a significant impact on your returns over time.
The average management fee for an index-tracking fund is 0.38% p.a., while actively managed funds typically charge around 1% p.a.1. Though these percentages might seem insignificant, their impact can compound dramatically over the years.
And while 0.38% p.a. is the average management fee for index products, some broad-market products, such as the A200 Australia 200 ETF which tracks the performance of 200 of the largest companies by market capitalisation on the ASX, offer even lower fees at just 0.04% p.a.. Over time, these reduced fees allow a greater portion of your returns to remain invested, enhancing the compounding effect.
Let’s examine the numbers.
By way of example, consider a hypothetical scenario where you contribute $500 monthly to three different funds over a 20-year period: one with 0.04% fees, another with 0.38% fees, and an actively managed fund with 1% fees (for simplicity, it is assumed the annual return for each fund is 7% p.a.).
Investment type | Total contributions | Annual return (p.a.) | Balance after 20 years |
ETF (0.04% p.a. management fee) | $120,000 | 7% | $257,199 |
ETF (0.38% p.a. management fee) | $120,000 | 7% | $246,899 |
Active fund (1% p.a. management fee) | $120,000 | 7% | $229,365 |
Source: Betashares. This hypothetical example is provided for illustrative purposes only. Does not account for taxes and any other fees and costs, such as platform and brokerage costs. Also, this example does not take into account any distributions.
This hypothetical example shows the significant impact that fees can have on returns over the long term. After 20 years, an investor paying 0.04% in annual fees ends up with $27,000 more than one paying 1%, and around $17,000 more than an investor paying 0.38% in fees.
In addition to fund fees, brokerage fees introduce another layer of expense and are crucial to the overall cost equation. For an investor making monthly contributions, a $10 brokerage fee per trade would amount to $2,400 over 20 years. While this might seem manageable initially, these fees – and the time it takes to trade – can snowball quickly for those who invest regularly and own multiple ETFs or securities.
The key takeaway? By minimising expenses, such as management and brokerage fees, investors can significantly boost their long-term returns, allowing more of their money to grow over time. On Betashares Direct, you can invest brokerage-free in all ASX ETFs and more than 300 ASX-listed shares.2
2. Diversification: A shield against uncertainty
Diversifying across different asset classes and markets reduces risk and increases the potential for stable, long-term returns. Here’s why it’s essential:
Firstly, different asset classes perform differently over time.
We explored in this article how different asset classes – equities, fixed income and cash – can produce different outcomes over the years. For instance, cash delivered a modest 0.3% return in 2022 when Australian and global equities declined by more than 6%. However, in 2023, international equities surged over 20%, while cash, even with rising interest rates, yielded only 3.2%.3
While (in hindsight) keeping much of a portfolio in cash may have seemed wise in 2022, it proved costly the following year as markets rebounded.
Secondly, international diversification unlocks opportunities beyond the ASX.
With the ASX representing just 2% of the global equity market2, Australian investors may have limited exposure to high-growth sectors like technology. Diversifying internationally provides access to global giants such as Apple and Tesla, key components of the NDQ Nasdaq 100 ETF .
Expanding beyond Australia not only reduces dependence on the local economy but also opens up a wider array of growth opportunities. Meanwhile, diversifying across different asset classes helps to mitigate risks.
Investors who are seeking a one-stop shop for diversification can consider Managed Portfolios on Betashares Direct.
Managed Portfolios are low-cost diversified portfolios constructed from ASX-traded ETFs by Betashares’ investing experts, taking the work out of creating a diversified portfolio.
Investors can select from diversified portfolios designed to help build or preserve wealth, for a range of risk profiles.
3. Compounding: The magic of time
Compounding is often called the “eighth wonder of the world” for good reason—it has the potential to turn small, consistent contributions into substantial wealth over time.
At its core, compounding involves earning returns on your returns, and the earlier you start investing using a disciplined and consistent approach, the more pronounced its effects will be.
By way of example, consider an investor who begins contributing $500 per month starting at age 25, and with each subsequent ‘comparison investor’ starting 10 years later, with their investment achieving (again, for simplicity) an annual return of 7%. By the time they reach age 65, their final balances will vary significantly, as illustrated in the table below.
Starting age | Monthly investment | Number of years invested | Total contribution | Estimated future value of investment (at age 65) |
25 | $500 | 40 | $240,000 | $1.30 million |
35 | $500 | 30 | $180,000 | $605,927 |
45 | $500 | 20 | $120,000 | $258,444 |
Source: Betashares. This hypothetical example is provided for illustrative purposes only. Does not account for taxes and any other fees and costs, such as platform and brokerage costs. Also, this example does not take into account any distributions.
The lesson? Consistency matters, and setting up automatic, recurring investments can ensure you make regular contributions without needing to time the market.
Betashares Direct’s Auto-invest feature allows you to set up recurring investments into up to five Betashares ETFs, making it simple to implement a dollar cost averaging investing strategy.
Conclusion: Simple, smart, long-term investing
The trifecta of lower costs, diversification, and compounding can provide a path towards building wealth over time. While the principles are simple, following them consistently can make a significant difference.
Betashares Direct is built to support investors along this path. With zero brokerage for all ASX ETFs and more than 300 ASX-listed shares, professionally managed portfolios to facilitate diversification, and auto-invest features that allow for regular contributions, you have the tools needed to grow your wealth without unnecessary complexity.
Smart investing isn’t just about what you buy—it’s about how you manage your investments. And with the trifecta in place, you can invest better, and more confidently, for the long term.
Investing involves risk. The value of an investment and income distributions can go down as well as up. Before making an investment decision you should consider the relevant Product Disclosure Statement and Target Market Determination (available at www.betashares.com.au) and your particular circumstances, including your tolerance for risk, and obtain financial advice.
References
1. ‘Why fees matter’, ASX, 01 March 2024
2. Other fees and costs may apply. Refer to the Betashares Invest PDS, available at www.betashares.com.au/direct, for more information.
3. Morningstar Australasia (Note: Past performance is not indicative of future returns)
4. ‘Going global: 3 ways to invest in international equities’, ASX, 05 April 2024