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Frequently Asked Questions
What is the difference between shares and managed funds?
Shares (also called stocks or equities) give you direct ownership in a individual company, so your return depends on that company's performance. Managed funds pool your money with many other investors and a professional fund manager invests it across dozens or hundreds of companies. In Australia, popular managed funds include those from Australian ethical investors like Future Super and Australian Ethical. Shares can be bought and sold on the ASX through a broker, while managed funds are typically purchased directly from the fund manager or through a platform like Netwealth or Macquarie. Managed funds offer instant diversification but charge ongoing management fees.
What is diversification and why does it matter?
Diversification means spreading your investments across different asset classes (shares, bonds, property, cash), sectors (banking, healthcare, technology), and geographies (Australia, US, Europe, emerging markets). The key benefit is that when one investment falls, others may rise, smoothing your overall returns. Diversification does not eliminate risk entirely but reduces the impact of any single poor-performing investment on your portfolio. In Australia, a common diversified approach is using index-tracking ETFs like VAS (Australian shares), VGS (global shares), and VDHG (diversified high growth), all available through brokers like SelfWealth or CommSec.
What is the time-weighted rate of return?
Time-weighted rate of return (TWRR) measures the performance of your investment portfolio independent of how much you contributed or withdrew. This is important because if you add $10,000 during a market crash, your total return would be skewed downward even if the portfolio itself performed well. TWRR essentially calculates the return for each sub-period between cash flows and chains them together, giving a true picture of the investment manager's or strategy's performance. Most financial planners and superannuation funds quote TWRR for this reason, as it allows fair comparison between different portfolios regardless of contribution timing.
Should I invest in ETFs or managed funds?
ETFs (Exchange Traded Funds) generally have lower fees (often 0.1-0.3% per year versus 0.5-1.5% for managed funds) and trade like shares on the ASX, so you can buy and sell throughout the trading day. Managed funds often require a minimum investment amount and can only be bought and sold at the end of the day. However, managed funds can offer more specialised or active strategies, and some allow regular saving plans with no minimum. For most passive Australian investors, a combination of low-cost ETFs like BGBL (global shares) or VGS (international) via a broker like Pearler or Stake offers the best value. Active managed funds may be worth considering for specific asset classes where active management adds value.
What fees should I watch out for in investments?
Investment fees compound against you just like poor returns, so understanding them is critical. Management fees (MER) typically range from 0.1% for index ETFs to 1.5% or more for active managed funds, and are deducted annually. Entry fees (often 0-5%) are charged when you first invest, while exit fees (increasingly rare) are charged when you leave. Performance fees of 10-20% of returns above a benchmark are common in active funds. Brokerage fees in Australia typically range from $0 (some apps) to $20 per trade. On a $10,000 investment with a 5% return, a 1% fee reduces your gain by 20%. A 0.2% ETF fee versus a 1.2% managed fund fee on $50,000 over 20 years can mean tens of thousands of dollars in difference.
What is dollar-cost averaging?
Dollar-cost averaging (DCA) means investing a fixed amount at regular intervals (e.g., $500/month) regardless of whether the market is up or down. Instead of trying to time the market (which even professionals struggle with), you automatically buy more units when prices are low and fewer when prices are high, averaging out your purchase cost over time. For Australians, many platforms like CommBank Invest, Nab, and Pearler offer regular investment plans with no or low fees for this purpose. Research by Vanguard found that timing the market incorrectly even a few times can significantly reduce long-term returns, making DCA a practical discipline for building wealth steadily.