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Should you invest money in funds (e.g. an index fund) or pick stocks individually yourself? Many people like the idea of choosing their own investments, and certainly this can be fun with a bit of spare money. Yet should you build an entire portfolio upon a stock-picking approach? Below, our team at Cedar House explains some of the pros and cons of both approaches. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Explaining stock picking versus funds
Investing individually in stocks has never been easier. A plethora of digital platforms exists which allow you to create an account, choose different company stocks on an exchange and invest in them. Depending on the platform, you may be limited in which stocks are available to you (e.g. Chinese stocks listed on the Stock Exchange of Hong Kong, or HKSE). You might also need to convert your money into another currency to trade, such as British pounds to US Dollars.
You can also invest in funds using many online platforms, and funds are typically the main way to invest via a workplace pension (although some providers may offer individual stocks). When investing in a fund, you are pooling some of your money together with other investors to invest in a specific group of investments (e.g. a group of stocks).
There are many types of funds which can be put into different categories, such as:
- Asset type. Some funds focus on investing in certain stocks. Others might invest in a different asset, such as bonds. You can also find “blended funds” which include both.
- Income versus growth. The former type tends to prioritise investments which provide investors with a regular income (e.g. through dividends). The latter is more concerned with building the overall value of the fund (e.g. increasing the total share price increase of the stocks inside it).
- Active versus passive. An active fund employs one or more fund managers and support personnel to pick individual investments for the fund (on behalf of investors). A passive fund tends to simply follow a market index, such as the FTSE 100.
- ESG or traditional. An “ESG” fund markets itself as a fund which focuses on “ethical” investments (e.g. green energy companies). A traditional fund is less concerned with moral criteria when choosing investments and is more focused on pure returns.
- Domestic, foreign or global. Some funds focus purely/mainly on UK-based companies or assets. Others may invest in a certain other country or region (e.g. Japan or East Asia), whilst a more “global” fund may select investments from all over the world.
The pros & cons of stock picking and fund investing
As you can see from the bullet points above, there is a lot of choice available to investors! This can create problems, however, as investors struggle to decide between them. Indeed, there are over 4,000 funds available to UK investors (even setting aside the 1,000s of individual stocks on offer!). It is impossible to research them all, so you need a robust system to narrow down your choices and find viable investment candidates for a portfolio. Working with a financial planner can provide information, software and experience to help you build a strong shortlist.
A crucial part of this process is making sure your portfolio is appropriately diversified (i.e. spread out across multiple companies, sectors and geographies). This helps to mitigate some risks that each investment might pose. Whilst it is possible to diversify with individual stocks, it involves a lot more micro-management and skill. Funds arguably have an inherent advantage by already providing a degree of “built-in” diversification, so you could build a strong portfolio by choosing a well-balanced mixture of, say, 6-12 funds. To achieve the same level of diversification using individual stocks, however, you might need to choose 100s of companies for your portfolio. This is simply too much time commitment for most people who have busy lives outside of investing!
Funds, however, do come with their own drawbacks. In particular, funds come with costs (e.g. management fees) that may be higher than others, but without demonstrating better investment performance potential. Active funds, for instance, need to pay the team they employ and this tends to be passed down to investors in the form of higher fees. Here, a financial planner can help you sift through your fund options and discern which ones provide good value for money. Sometimes, it may be worth paying a bit more to access unique investment opportunities and better performance potential. In other cases, generating strong “real” returns might be better achieved simply by investing in certain passive funds which follow the market (rather than trying to “beat” it, as many active funds try to do).
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk