Keen to invest but don't know where to start? Our expert breaks it down

If you've been hesitant to start investing in shares due to overwhelming terminology, you're not alone. The language surrounding shares can seem foreign, but it's actually quite straightforward once you understand the basics. One helpful acronym to remember is ETF, which stands for Exchange Traded Fund. These are a type of investment that allows you to diversify your portfolio across many assets, industries, and countries, which can help smooth performance and reduce risk.

Diversification is key in investing. By holding a variety of investments, you're less likely to be negatively impacted by poor performance in any single area. This is particularly important in today's uncertain world. While it used to be difficult to build a diversified portfolio on a small budget, thanks to the advent of index funds like ETFs, it's now much easier.

ETFs purchase a range of investments, and you simply buy shares in the fund, which gives you indirect ownership of all the assets it holds. This way, you're automatically diversified.

There are ETFs for a wide array of asset groupings, including those that invest in the ASX200 (the 200 largest companies on the Australian Securities Exchange), gold mining companies, cryptocurrency, top 10,000 companies globally, bonds and commodities, and more. Each ETF has its own focus, so it's important to research and choose the ones that align with your investment goals and values.

For example, if you're concerned about AI, you might want to avoid ETFs that include companies involved in that technology. Similarly, if you're worried about environmental damage, you might want to steer clear of ETFs that hold fossil fuel producers.

The fees charged by ETFs are deducted from your investment, similar to how fees work in superannuation. It's worth comparing fees across different ETFs to ensure you're getting the best deal. Like other investments, ETFs can help you build wealth in two main ways: through growth (as the value of the underlying investments increases) and income (through dividends paid to shareholders). Some ETFs focus more heavily on growth or income, so consider your preferences when making a choice.

ETFs, while popular, can also come with their own set of risks. Their prices can fluctuate, potentially leading to capital gains or losses. It's essential to only invest money you can afford to lose or that you won't need to access soon. Resources from Moneysmart and ASX can help you learn more about investing before diving in. If you're unsure whether ETFs are the right choice for you, consider consulting a licensed financial adviser who can help you assess your personal situation and ethical preferences.