ETF vs savings: common mistakes to avoid

Mistake 1: Using optimistic ETF returns for short timelines

The most common mistake is assuming ETFs will return 10% pa and using that to justify investing money you'll need in 1-3 years. Markets can drop 30-40% in a short period — the ASX fell 35% in early 2020. If you need the money at a fixed date, a bad year could force you to sell at a loss. Always use conservative return assumptions (5-6%) and stress-test what happens if markets are down 20% when you need the funds.

Mistake 2: Investing your emergency fund

Your emergency fund needs to be available immediately when life goes wrong — job loss, medical bills, car repairs. These events often coincide with market downturns (recessions cause both job losses and market falls simultaneously). Keeping your emergency fund in ETFs means you may be forced to sell at the worst possible time. Keep 3-6 months of expenses in a high-interest savings account, separate from your investment portfolio.

Mistake 3: Ignoring fees and tax

ETF returns look great before fees and tax. Management expense ratios (MERs) of 0.07-0.20% pa for broad market ETFs are low, but brokerage on frequent small purchases adds up. More significantly, capital gains tax applies when you sell — and if you sell within 12 months you lose the 50% CGT discount available to Australian investors. Factor in your marginal tax rate when comparing net returns.

Mistake 4: Comparing ETF returns to savings rates at their peaks

In 2023-2024, Australian high-interest savings accounts were paying 5%+ pa. Many investors compared this to ETF returns and concluded savings was better. But savings rates are not permanent — they follow the RBA cash rate, which will eventually fall. ETF returns (averaged over 10+ years) have historically exceeded savings rates over long periods, even accounting for volatility. Always compare over the relevant time horizon, not just the current moment.

Mistake 5: Trying to time the market

Switching between savings and ETFs based on what markets are doing is rarely successful. Investors who moved to savings in March 2020 (during the COVID crash) often missed the recovery. The most reliable approach is to decide your time horizon first, choose the appropriate vehicle, and stick to it. Use the calculator to model your scenario with conservative assumptions before making any changes.

Mistake 6: No plan for what happens if markets fall

Before investing in ETFs, ask yourself: if my balance drops 30%, what will I do? If the honest answer is "sell everything," ETFs may not be right for you — or you need to reduce the amount invested. Having a written plan (e.g. "I will not sell unless my situation fundamentally changes") helps prevent emotional decisions that lock in losses.

Related pages in this series

• ETF vs savings: pros and cons
• ETF vs savings for 1 year
• ETF vs savings for 3 years
• ETF vs savings for an emergency fund
• ETF vs savings during high interest rates