How to set up your portfolio

Recently Malcolm Turnbull, the minister for Communications, revealed his investment portfolio and may have surprised many that amongst his many investments, he held shares in just one Australian company, BHP Billiton (ASX: BHP).

But his investment strategy has been praised by many experts, including Equity Trustees (ASX: EQT) chief investment officer George Boubouras. “He’s got great diversification. If more self-managed super funds (SMSFs) were structured like this we wouldn’t have a worry in the world,” he said. Mr Turnbull’s investment portfolio contains a diverse mix of exposure to shares, fixed income, bonds and debt, property as well as commodities.

Many Australian investors and SMSF trustees may believe they are well diversified, by holding a mix of shares, cash and term deposits. But the fact is that with current low interest rates, an Australian share market crash could devastate their portfolios.

Not many Australians invest in international equities or exchange traded funds (ETFs), mainly thanks to the process being more costly and difficult that it really should be. As an example, Australia’s largest online broker, Commsec, charges $65 in brokerage to buy international shares, plus a host of other fees and charges. And while there are cheaper brokers out there such as Options Express, they are less well known.

But the range of ETFs available on the ASX is growing daily, and they are becoming more popular, as they can be traded at normal brokerage rates, just like shares in the banks, Wesfarmers (ASX: WES) or Woolworths (ASX: WOW). The ASX has a list of all the available ETFs here. They are also perfect for SMSFs to further diversify their portfolios – Mr Turnbull and his wife hold no less than 13 low cost ETFs in their portfolio, giving them access to a wide range of investment classes – as mentioned previously.

As the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) pushes ever higher, diversification becomes ever more important, especially for self-funded retirees and SMSF trustees. And research from a former UBS fund manager shows that the average management fee for a managed fund is 1.9%, resulting in around 45% of fund performance being lost to investors. According to his research, the average Australian share fund has returned just 2.3% over the past five years.

Foolish takeaway

On a personal level, I’m in the boat with most Australian investors and have less diversification than I would like. While I have some exposure to international equities through ETFs, I’ll be looking to increase my portfolio allocation to more diversified ETFs over the short term, as well as investing in some of the Motley Fool’s Share Advisor and Hidden Gems investment ideas, of course!

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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