How to Invest in ETFs: A Simple 6-Step Guide

Ignore the conventional wisdom: DIY ETF investing is easier than buying a managed fund, and you will almost certainly end up with more money in the long run.

Investing in ETFs is a great way for beginners to get started building wealth over the long term. It is one of the simplest and cheapest way to build a diversified portfolio of investments.

Experienced investors are also turning their back on managed funds. History tells us that almost everyone is terrible at beating the market over the long term, so paying fund managers for underperformance is a bit silly.

Now that’s all very well, but how do you actually go about investing your money in ETFs? The following step-by-step guide is, as it should be, simple and straightforward. Investing successfully isn’t hard over the long term, and getting up and running is easier than ever.

1. Decide on an investment strategy

Are you investing for the long term? Do you want a classic mix of shares and bonds? Would you like target a particular commodity or sector? Would you prefer to invest as sustainably as possible?

These are questions that will vary depending on an investor’s values and goals. The ETF universe covers all areas of the global market, and should you wish to take a punt on Bitcoin or biotech or Brazil, ETFs allow you to do so with relative ease.

How much money to put into each ETF is a more difficult question. A classic strategy is known as the core-satellite approach. The bulk of your investment goes into solid index tracker ETFs, like a global equity ETF paired with a global bond ETF. This will be the dependable mainstay of your portfolio with relatively predictable long-term performance.

The rest of your cash is invested in more speculative ETFs, satisfying your hunch on a particular industry or commodity, or perhaps targeting an area that aligns with your values such as climate change.

But don’t feel like you have to spread your money around. A simple two-ETF portfolio of global stocks and bonds, with no “satellites” at all, is still one of the most powerful strategies you can employ.

And if you are comfortable riding the stock market rollercoaster without losing your lunch, investing in a single global equity ETF has historically been one of the best ways to maximise your long term return.

2. Research and choose the ETFs that suit your strategy

But don’t overthink it. Concentrate on the core of your portfolio: your big, diverse equity ETF and your boring, diverse bond ETF.

It’s easy to become paralysed by choice. For now, forget about your cute little satellite bets and put your money to work.

Once you have your solid foundation built, then spend some time working out how best to target the areas of the world economy that are important to you.

Or not. Feel free to stop there and let your core portfolio do it’s thing. Warren Buffett believes the best investment for nearly everyone is a stock market tracker ETF paired with a bond ETF. He’s not being patronising – based on historical data that strategy will beat almost all managed funds.

For help choosing ETFs for your core portfolio, see our guide to the best global equity ETFs, and our look at the best global bond ETFs to invest in.

What about the satellite investments? That’s a very personal choice and will depend heavily on your own goals and values. Check out our ETF Master List for a curated, categorised collection of possibilities covering the full gamut of the ETF universe.

3. Choose an investment platform

The new breed of online investment platform makes investing easier than ever. They are cheap and easy to use and just as safe as the venerable, more expensive platforms. You can be up and running with a portfolio of ETFs in less than 10 minutes! But what are the most important things to look out for?

Costs, costs, costs. It is the most overlooked aspect of investment platform selection. Get it wrong and it will cost you thousands of pounds over the long term. The difference between a free platform and a platform that charges you 0.5% per year is a lot larger than you may think.

If your average annual return is 7% over 30 years, a mere 0.5% annual fee will mean losing 18% of your profits. If you invest £100,000 you’ll give up £100,000 in returns to fees alone over the period – the same amount as your initial investment!

Ask yourself this: what are you getting in return for the fee you pay your investment platform? It better be something amazing. Remember that the majority of tools and research offered by expensive platforms is available for free elsewhere on the internet.

So, some of the questions to ask yourself when choosing an investment platform:

• What does the platform charge you for using it?
• Does it offer the ETFs you want to invest in?
• Is it simple to use?
• What are the platform fees?
• Is it a legitimate platform, registered with the Financial Conduct Authority?
• Is your money protected by the Financial Services Compensation Scheme?
• What does it cost?!?!

4. Set up an automatic payment

Discipline. It’s not for everyone. Remembering to transfer money to your investment account every month is not something many people are good at. It’s also just one more bit of admin that you really don’t need in your life.

Sometimes we need to automate these things. Automatically contributing to your investments every month is a way of taking your unreliable, flaky brain out of the equation.

So what percentage of your monthly pay should you invest? There are a billion personal finance gurus who have an opinion on this, some of whom advise living like a pauper so you can retire at 50.

Our advice? Set aside as much as you can each month, but don’t sacrifice what may be the best, healthiest years of your life. After all, you might get hit by a bus on your 50th birthday.

The other great thing about auto investing is that the ETF purchases are usually offered free, so you can completely sidestep commission. Check to see if your broker offers this service – it will make a huge difference in the long run.

5. Set a reminder to rebalance your portfolio

What is rebalancing? If you have more than one investment in your portfolio, they will of course perform differently over a period of time. If one goes up by a lot, and the other declines or stays the same, the percentage of your investment wealth will become more concentrated in the better performing ETF.

Rebalancing simply means bringing the percentage of each investment back to where you want it. If you invest 60% in an equity ETF and 40% in a bond ETF, you might find after a good year for the stock market that your equity percentage has crept up to 70%. Rebalancing involves selling some of your equity ETF and reinvesting it in your bond ETF, resetting the ratio to 60:40.

It’s a good idea to rebalance every 6-12 months. It doesn’t matter when you do it, but setting a calendar reminder will make sure you don’t forget. Some platforms do it automatically for you for free, others with a simple click of a button.

If you invest outside of a tax-free wrapper such as an ISA or a SIPP, anytime you sell a portion of your investments you should be aware of any tax implications. For a detailed rundown of what your tax obligations are as an ETF investor, see our Guide to ETF Tax for UK Investors.

6. Ignore the short term market nonsense – you’re playing the long game

Long-term investors need to be aware of the three key perspectives required for successfully managing their investment journey:

1. Long-term goals.
2. Medium-term visibility of any potential need to sell your investments.
3. Short-term resilience in the face of market turmoil.

Markets don’t go up in a straight line. Over a decades long investment journey there will be many market slumps and probably the odd outright crash. Try to remember that with the benefit of hindsight, these events are put in a broader context. When you are feeling the panic rise, it’s important to zoom out.

Conclusion

Investing in the modern world is easier than ever. ETFs allow instant diversification and better long-term returns than almost all fund managers, and low-cost investment platforms can have you set up in less than 10 minutes. Once you know how to invest in ETFs, the difficult bit is deciding where to invest your money, but hopefully websites like this one help make that process a bit easier.