What’s best for the average investor – shares or funds?

With lots of people taking up investing for the first time, Rob Morgan looks at the two main ways to get involved.

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  1. Rob Morgan

Lots of people are taking their first foray into investing currently, but what’s the best route into markets for the average person getting started?

Formative experiences often involve buying into individuals shares – the tiny bits of companies that are traded on the stock market. However, these can sometimes deliver some harsh lessons. That’s certainly been the case for anyone buying Deliveroo shares in the recent offer that saw the price drop sharply as soon as trading started. Elsewhere, the volatility and anti-establishment narrative surrounding GameStop has attracted some ill-advised betting.

The potentially dangerous thing about investing is that you can sometimes make money even if you barely understand what you are doing. Blind luck or simply buying into a fashionable ‘story’ that attracts crowds of investors chasing upwards momentum can lead to short term gains and overconfidence. But fashions change and momentum can suddenly reverse, which leaves the uninformed investor with nowhere to turn. Should losses be cut, or should they hang on? Without a grasp of the fundamental facts about a business and the anchor of proper research and knowledge, buying individual shares can go wrong. Especially if hope is abandoned at the worst possible moment.

Doing your homework

Liking a company’s product or service might get you interested in it, but it is not a reason on its own to own a stock. Successful share investing will likely involve much more: Research on earnings, the state of the balance sheet, competitive position, expansion plans and so on is necessary for a full analysis.

For some people who have the necessary time, aptitude, enthusiasm and psychological make up it can be exceptionally rewarding, both intellectually and financially. But be under no illusion it will be hard work if you want to do it properly – and not everyone wants to spend their spare time scouring company accounts, following industry developments and assessing key metrics.

In contrast, uninformed investing in shares, especially short-term trading, is akin to gambling. There is nothing wrong in that provided it is money the individual can afford to lose – but not so if the sums involved are life changing. I wrote more about the blurred lines between investing and gambling here.

What’s the alternative?

For those that don’t want to choose individual shares, there is another route. Funds such as OEICs, ETFS and investment trusts allow you to invest in the stock market and instantly spread your investment – and risk – across dozens of different companies.

For instance, an ‘active’ equity fund manager typically selects a range of shares, usually 50 to 100, which means less reliance on the performance of any one company. Or, in the case of an index fund or ‘tracker’, the fund simply offers exposure to all the shares in the index.

Warren Buffett, one of the most well-known investors of our time, and someone who has made a fortune handpicking successful shares, is famously a fan of funds that track the performance of the largest US index, the S&P 500 for the average person. He believes most investors would be better off buying index funds rather than single stocks because, over the long-term, they tend to be poor at picking individual stocks.

A ‘hands off’ approach of buying funds is certainly more straightforward than committing to select individual shares, but you should still do a little research. There are lots of different types of funds, both in terms of their structure and what they invest in. Before you start choosing your own funds, take some time to learn about the features of the various products on offer. There is a useful run down in our Introduction to Investing in Funds Guide.

Fund ideas

Fund investors still face the problem of choice. There is a bewildering array – several thousand in fact! Our Foundation Fundlist is designed to narrow the field and provide a manageable number of fund options across the most popular sectors and investment areas. Covering both passive and active funds, it could be a useful starting point for your own research.

If you would rather make the bare minimum of investment decisions, ‘multi-asset’ funds could be a convenient solution. For instance, funds in Charles Stanley’s Multi Asset Fund range provide diversified portfolios in one easy-to-buy investment, managed and monitored by our experts. You just need to choose the risk level you are comfortable with. They could also be a ‘core’ holding for more experienced investors, around which other holdings can be added.

A bit of both

There are pros and cons for both types of investments. Funds are convenient and give you instant diversification across a given area, while buying shares allows you to truly tailor your portfolio to the companies and themes you are interested in. Lots of investors do a bit of both, establishing a central portfolio of funds with some shares on the side for more involvement and fun.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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