ETF strategies for beginners: building a diversified portfolio

This is episode 6 in our ETF investing series. ← Go to episode 5: 'Hands-on guide: how to start investing in ETFs today'

Building a successful ETF portfolio doesn't require complex strategies or constant trading. For Saxo Bank clients new to ETF investing, these straightforward approaches can help create a resilient portfolio designed for long-term growth.

Dollar-cost averaging: consistency beats timing

Dollar-cost averaging involves investing a fixed amount at regular intervals, regardless of market conditions. This disciplined approach removes the stress of trying to time market highs and lows.

How it works in practice:
A Saxo Bank client investing €500 monthly in a global equity ETF will purchase more shares when prices are low and fewer when prices are high. Over time, this typically results in a lower average cost per share than trying to time market entries.

Real-world example:
During the market volatility of 2020, investors who maintained monthly €500 contributions to a global ETF automatically bought more shares during March's lows and fewer during December's highs—without needing to make emotional decisions during uncertain times.

Core-satellite strategy: balancing stability and opportunity

The core-satellite approach divides your portfolio into two components: a stable "core" of broad market ETFs and smaller "satellite" positions in specialized ETFs.

Portfolio structure:

• Core (70-80%): low-cost, broadly diversified ETFs tracking major indices
• Satellites (20-30%): specialized ETFs targeting specific sectors, themes, or regions you believe have growth potential

Real-world example:
A beginning investor might allocate 75% of their portfolio to a combination of global equity and bond ETFs (the core), while using the remaining 25% for targeted exposure to areas like technology, healthcare, or emerging markets (the satellites).

The 60/40 portfolio: time-tested balance

The classic 60/40 portfolio—60% stocks and 40% bonds—has been a staple allocation strategy for decades, offering a balance between growth potential and stability.

Modern implementation with ETFs:

• 60% in equity ETFs (potentially divided between global, regional, and sector ETFs)
• 40% in bond ETFs (government, corporate, or a mix based on your risk tolerance)

Real-world example:
A Saxo Bank client nearing retirement might implement this through a global equity ETF (60%) paired with a high-quality corporate bond ETF (40%), creating a portfolio designed to weather various market environments while still providing growth potential.

The three-fund portfolio: simplicity at its best

For those who value ultimate simplicity, the three-fund portfolio uses just three broad-market ETFs to create a globally diversified investment mix.

Portfolio components:

• Total domestic stock market ETF (e.g., covering your home country or region)
• Total international stock market ETF (covering developed and emerging markets outside your home region)
• Total bond market ETF (providing fixed income exposure)

Real-world example:
A European investor might allocate 40% to a STOXX Europe 600 ETF, 30% to an MSCI World ex-Europe ETF, and 30% to a European Aggregate Bond ETF—creating comprehensive global exposure with just three holdings.

Age-based asset allocation: adjusting with your timeline

This strategy bases your stock/bond allocation on your age, automatically becoming more conservative as you approach your investment goal.

Traditional formula:
Subtract your age from 100 to determine your equity percentage (remainder in bonds)

Modern adaptation:
Many financial professionals now suggest subtracting from 110 or 120 instead of 100, recognizing increased longevity and the need for growth.

Real-world example:
A 30-year-old using this approach might allocate 80-90% to equity ETFs and 10-20% to bond ETFs, gradually shifting toward more bonds with each passing year.

The most important strategy for beginners is the one you'll actually follow consistently. Choose an approach that matches your temperament and time availability, then commit to it through market cycles for the best long-term results.

Next up: episode 7 –The power of compounding: how ETFs help build wealth