Q&A, your way: Episode 5
Morningstar's director of product management, Mark LaMonica, answers a question about investing in an ASX200 index fund.
Mark Lamonica: Thank you, Nicola. See if you asked a very hard one here.
So, would investing solely in an ASX 200 Index fund be a bad idea? Beginner investor here. So, just to clarify, I'm using the CommSec Pocket app, which allows me to invest in the ASX 200. It is called the Aussie Top 200. My understanding is that the ASX 200 Index fund allows me to invest in the top 200 largest or most successful companies in Australia, and what reason might someone choose a different strategy?
All right. So, good question. Here you go. See how I go. A couple of things. First of all, to clarify what the ASX 200 is – so, that is the 200 largest companies in Australia. And when we talk about largest companies, we measure that by market cap or market capitalization. So, what that means is we multiply the share price, times the number of shares out there. So, they are the companies that are worth the most in Australia. So, that's the first thing.
The second thing – is this a good idea and what are the alternatives? Well, it depends. So, there are no good and bad investments, but there are good and bad investments for you based on what you're trying to accomplish. So, if we think about the ASX 200, let's look at what that actually means. Because there's a market capitalization weight in that index, it means the largest companies are going to get the highest allocation. So, if we think about Australia, what the largest companies are, they're generally miners and banks. So, most of your money is going to go into miners and banks. Those banks are very domestically focused. They're focused just on Australia, primarily. The miners are very much focused on China because that is who buys the vast majority of what's mined here in Australia. So, just understand that if this is what you choose to invest in, those are the primary exposures you're going to get.
Why might somebody not want to do that? Well, they might not want to do that because they want to be more diversified. They want to be more diversified into different industries. Things like technology aren't represented a lot in Australia. You're not going to get much exposure to that. You might be interested in bonds or cash if you want to lower the volatility in your portfolio. So, think holistically about what you're trying to accomplish, what your goals are, and then the returns and exposures you need in order to achieve those goals.