Interest rates at record lows are fantastic for borrowers and not-so-good for first home buyers saving for a home.
Where can you turn to save for a home deposit?
According to Fidelity, a $10,000 investment in Australian shares over the past 10 years to 31 December 2019 has returned 11.2% pa which resulted in dollar value of $26,881. This crushes the savings rates offered by the banks.
With a long-term viewpoint to acquire a home, you could achieve a return well in excess of current interest rates on savings accounts and term deposits offered by the big banks by investing in Australian shares.
While investing in shares carries risk in the short term, you could achieve market returns of the S&P/ASX200 Index (ASX: XJO) by investing in an exchange-traded fund (ETF) such as the BetaShares Australia 200 ETF (ASX: A200).
I see 2 big benefits of investing in an ETF that tracks the performance of the ASX 200:
- Low management cost (0.07% pa for BetaShares Australia 200 ETF)
- Diversification to reduce company-specific risk
Benefit 1: low management costs
Paying high management costs significantly impacts on the long-term return investors receive on their investments.
The more you pay in management fees, the more you could lose out on meeting market performance.
The real impact of fees over the long term can mean losing out on thousands of dollars!
Benefit 2: diversification
The point of diversification is to eliminate risk that can result from putting all your eggs in one basket. An ETF tracking the ASX 200 like BetaShares Australia 200 can provide protection to an investor portfolio.
The top 10 ASX shares in the BetaShares fund are:
- CSL Ltd (ASX: CSL)
- Commonwealth Bank of Australia (ASX:CBA)
- BHP Group Ltd (ASX: BHP)
- Westpac Banking Corp (ASX: WBC)
- Australia & New Zealand Banking GrpLtd (ASX: ANZ)
- National Australia Bank Ltd (ASX: NAB)
- Wesfarmers Ltd (ASX: WES)
- Woolworths Group Ltd (ASX: WOW)
- Transurban Group (ASX: TCL)
- Macquarie Group Ltd (ASX: MQG)
The top 10 is composed of companies in the healthcare, banking, mining, retail, and industrial sectors.
Investing in an ETF may be an excellent way for investors to gain exposure to the share market. As company-specific risk is reduced, you can receive a return similar to the ASX 200. This return can help want-to-be first homeowners save for a home.
In my view, investing in the share market can help first home buyers who are saving for a deposit with a medium to long term horizon. In the short term, it can be very volatile and result in losing a substantial amount of capital.
Trying to outperform the ASX 200? How about these shares below?
5 stocks under $5
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Matthew Donald owns shares of National Australia Bank Limited and Wesfarmers Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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