How to Build Your ETF Portfolio: Step by Step Guide
Step 1: Understand Your Risk Tolerance – Growth vs Defensive
Before picking a single ETF, get honest with yourself about how much volatility you can actually stomach. This isn’t just a feelings question, it directly shapes your asset allocation.
If you’ve got a long time horizon (7 to 10+ years) and won’t need the money any time soon, you can generally afford to lean into a higher growth, 100% shares allocation, since you’ve got time to ride out the inevitable downturns along the way. If you’re more risk averse, have a shorter time horizon, or you know from experience that market drops make you want to sell, a bit of built in ballast (like a bond allocation) might help you actually stay invested when things get rocky.
Step 2: Decide How Much Diversification You Want to Manage Yourself
There are two broad paths here:
- The all-in-one route: pick a single diversified ETF (like DHHF or VDHG) that handles the diversification and rebalancing for you.
- The build-it-yourself route: combine a handful of individual ETFs (like an Australian shares ETF and an international shares ETF) to construct your own allocation.
Neither is more correct. It’s a genuine trade off between simplicity and control.
Step 3: Decide How Much Australia You Want
This is one of the more personal decisions in building a portfolio. Australia makes up a small fraction of the world’s total share market by value, yet many Australian investors deliberately hold more of it than that would suggest.
There are legitimate reasons for this home bias:
- Franking credits, which are only available on Australian company dividends, and can meaningfully boost after tax returns
- Currency matching, since your expenses are in Australian dollars, holding some Australian assets reduces currency risk
- Familiarity and confidence, which, while not a financial reason on paper, genuinely helps some investors stay the course
The trade off is that leaning too heavily into Australia means missing out on the depth and diversity of global markets, particularly sectors that are barely represented on the ASX, like large scale technology.
A common starting point for many Australian investors is somewhere in the range of 30 to 40% Australian shares and 60 to 70% international shares, though there’s no single “correct” split. It comes down to your own comfort level.
Step 4: Pick Your Core ETFs
Once you know your risk tolerance and your approach to diversification, choose your actual ETFs. This might be a single all-in-one fund, or a combination like an Australian shares ETF (VAS, A200, or IOZ) paired with an international shares ETF (VGS or BGBL).
Step 5: Decide Your Allocation Percentages
If you’re building your own multi-ETF portfolio, lock in your target percentages. For example, 40% Australian shares and 60% international shares. Having this written down gives you something concrete to rebalance toward later, rather than guessing.
Step 6: Set Up Regular Investing
Rather than trying to time a “perfect” entry point, set up a recurring investment that matches your pay cycle, and automate it if your broker allows. Consistency matters far more than timing.
Step 7: Review Periodically, But Don’t Overreact
Check in on your portfolio every six to twelve months to make sure your allocation hasn’t drifted too far from your targets, and top up or rebalance if needed. Outside of these check ins, resist the urge to constantly watch and react to daily market movements. Long term investing rewards patience, not fiddling.
Summary
Building an ETF portfolio isn’t about finding some secret perfect combination. It’s about understanding your own risk tolerance, deciding how much you want to manage yourself, working out how much home bias feels right to you, and then investing consistently into a sensible, diversified set of ETFs over time.
TLDR:
How much growth assets vs defensive?
Do I go all-in-one or DIY?
How much investment in Australia vs international?
Select ETFs that fit your goals
Case Example
We have a person named Daniel who is 30 years old.
How much growth assets vs defensive?
He is 30 years from retirement so goes with 100% growth assets – he has all the time in the world to ride out market volatility and the ups and downs. As he approaches retirement, he increases defensive assets (bonds/cash) in his portfolio so that a large downturn doesn’t hurt him too much when he needs to sell and access funds.
Do I go all-in-one or DIY?
He has spare time after work and loves tinkering with his investments – he also likes the idea of being able to be flexible in the % allocation to australia vs international. He wants to DIY his portfolio
How much investment in Australia vs international?
Daniel has 2 investment properties in Australia, earns his wage here and his super is invested mainly into Australian Shares. He weights up franking credits, potential growth and his own personal situation and decides on a 30% Australian and 70% International portfolio.
Select ETFs that fit your goals
Daniel does research and has heard a lot about Vanguard so for his 30% Australian split – he decides to go with VAS.
He then does his own research again, discovering VGS for his 70% International split.