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An ETF saved me from Russian Roulette

One of the scariest propositions you can deal with as a financial adviser is to play around with the timing of a stock market. And one of the rules of thumb or maxims of our game is that it’s ‘time in the market’, not ‘timing the market’, that’s important.

Wrapping it up

Recently we had a new client who came from a situation where he was on a wrap platform that didn’t suit his new circumstances, goals and appetite for risk. In addition, we could see he would be charged lower fees by using a self-managed super fund (SMSF) and so that was our recommendation.

We also wanted to tweak his portfolio so that it was less risky, more dividend-oriented and a better reflection of his new attitude to risk. This guy had been an entrepreneur with an aggressive investment stance and was now someone wanting steady growth and a lot more sleep-at-night security.

A wrap account allows you to control all your investments within one account – even if they come from a number of different providers. One of the challenges of disentangling from a wrap and then reworking a portfolio is that it can take time, but time can be your friend if you cash out a portfolio on a wrap to reconstruct one for a SMSF.

The problem

Now our predicament came on July 26 when Mario Draghi – the European Central Bank (ECB) boss – decided to positively shock global financial markets with his “whatever it takes” promise to save the euro. From that date, the S&P/ASX200 index rose from 4,123.9 to 4,312.6 by August 8, which was a 4.6% move and on a portfolio of around $2 million. That was a potential $90,000 loss if we had our client out of the market for too long.

The solution

Thankfully, nowadays products such as exchange traded funds (ETFs) that track the index are available and an ETF became a default position until we were in a position to put the new portfolio together.

Personally, I’m concerned about ETFs that are derivatives as they could be risky and I’m not sure if everyone who uses them is aware of the potential problems that could go with these instruments for ‘sophisticated investors’.

On the other hand, ETFs that buy the underlying securities have a lot of appeal because the product-makers actually buy and hold the relevant 200 stocks when you put your money into an ETF that tracks the S&P/ASX200 index. You also get the associated dividends that would go with these stocks.

These are a good product innovation and can be used to help SMSF trustees create a diversified portfolio of investment assets. They can also help an adviser out of a tight and potentially risky situation, where a $90,000 gain looks a lot better to a client than $90,000 that never was!

Find out more about ETFs on our website by reading What is an ETF? [1] or JP Goldman’s recommendations [2].

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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