At times the discussion can quickly focus on implementation questions - best products, best structure - rather than the overall investment strategy.
While the selection of the product vehicle is clearly important the pre-eminent decision for investors remains the asset allocation decision because that is what a deep body of research shows is the crucial determinant of your portfolio's performance.
The discussion between the investment strategy and the structure to implement it can easily become blurred. As investors it is natural to want to talk about what shares to buy, what property to look at, what manager's fund to consider...
An example recently has been some of the media debate about whether you are better off investing via exchange traded funds (ETFs) or traditional managed funds.
The debate has no doubt been fuelled by the continuing growth in popularity of ETFs - both in Australia and globally. As of June 30, 2015 total ETF assets stood at $US2.9 trillion which was 11% of total fund assets but what has been clear over the past 10 years is that ETFs have been growing at a faster rate to the traditional fund world.
While the Australian ETF market lagged the global trend initially in recent years it has also been growing strongly and this year to date around $4.5 billion has been invested in the Australian ETF market.
When it comes to any discussion around the right product or structure one simple rule overrides all others - if you do not understand it you should not invest in it. It is critical that as an investor you understand what you are investing in. That is also where getting specialist professional advice can be valuable because professional advisers ought to be able to explain the differences as well as any advantages and disadvantages that certain structures offer.
When it comes to ETFs versus managed a key point to understand is that they share more common characteristics than differences. They are both pooled vehicles that provide exposure to a range of markets and offer diversification usually at reasonable fees. They issue and redeem new units to meet investor demand.
With Vanguard most of our ETFs are a share class of the managed fund so ETF investors share a common investment pool with fund investors. What is different is the way that investment portfolio is accessed - the investor in the unlisted fund either invests via an adviser or directly. The ETF investor buys or sells via their broker and the ASX.
When deciding whether to implement your investment allocation via managed funds or ETFs (or a mix of both) there four factors worth considering: investment strategy, trading flexibility, accessibility and costs.
For investors the investment strategy question comes down to whether you want to take an actively managed approach or primarily an index-based with your portfolio. Most managed funds are actively managed while ETFs are mainly index-based strategies although the indexing concept has been expanded recently to include non-traditional indexes. In fact such indexes represent rules-based active strategies that attempt to outperform traditional market-cap-weighted benchmarks.
The ability to transact at the daily net asset value of a managed fund is likely to offer enough flexibility for most investors. However, the exchange-traded nature of ETFs does give investors more flexibility and the ability for intraday trading - albeit with brokerage costs to be taken into account.
Accessibility is also where some investors favor ETFs because investors have access to any ETF listed on the exchange where platforms used by advisory groups will typically have a restricted or approved product list.
Costs are a key consideration for investors in any investment product. With managed funds the major cost is the management expense ratio. With ETFs there will also be an underlying management expense ratio but you also need to factor in transaction costs for each time you trade.
Whether you opt for ETFs or traditional funds will depend on what type of investor you are.
What is key is to get establish the right strategy for you and then decide on the structure that will allow you to implement it the most cost-effective way possible.
By Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
19 October 2015