Should I Invest in Funds or Shares?
When we invest, we want the best return possible. And people are often curious whether they should invest in funds or in specific shares of companies. There’s a follow up question then of whether to invest in funds as Investment Trusts, funds or ETF’s as well - but that’s a question for another day.
I’ve covered the pros and cons previously and in a number of my courses, so I won’t go into them too much here.
And if you’ve been paying attention across the rest of this blog, you’ll know what my general preference is…
Personally I prefer to invest in funds, and for most of the people I work with, I think it’s the best option as well.
If you pick the right share, you can do very well over the long term… if you pick the right one.
On the London Stock Exchange, there are around 2,600 companies you could invest in. If you invest in a fund that bought into all of these, you will get average performance.
If you selected the top 26 companies, I have no doubt you’d make more than 100% per year growth. If you selected the bottom 26 companies, I’ve no doubt you’d lose everything.
The problem lies in trying to know the difference between the two groups. There are people out there paid millions to try and figure it out, and they often don’t. So why are you going to be better at it than them?
A GREAT return for a fund manager is 20%+ a year, but you’ll often hear someone down the pub talking about how they bought into Amazon shares for $18 and now they are worth 10x that amount.
Great, everyone can be lucky once or twice. But if a gambler only ever tells you about their winners, you’d think they were a genius!
Funds remove your own bias from the investing equation. If you invest in trackers or more algorithmic trading funds, then it removes everyone’s bias. That’s what a FTSE 100 tracker does - just invests in the top 100 companies in the UK. Doesn’t matter if everyone thinks a company is about to do really badly or really well… if it’s in the top 100, it gets invested in.
Everyone wants to think they are above average intelligence. And to be fair, there’s a good chance you are if you’re geeky enough to be reading blogs like this.
However, intelligence has disturbingly little to do with your success as an investor. But I know you’re already thinking;
‘He is probably just biased because he’s rubbish at investing in shares, I could definitely do it better’.
Which is fair enough. It’s important to do what you want to do in life and in investing. But do me a favour and trust Uncle Damien a little bit, and at least only invest in individual companies alongside funds. Get your hit of excitement from a small % of your portfolio, and if after a few years you’ve done really well with it. Then consider getting rid of the funds and investing all your money in individual companies.
But even then, diversification is a very overlooked and undervalued thing in investing, so maybe keep some in funds still.
Just for me? As a favour. It’ll make me feel better knowing you can’t lose everything because a law changes or a takeover doesn’t work out, or a product gets recalled.
Invest in funds, invest in shares. It is of no consequence to me. I do not care.
But at least you’ve now heard why I prefer funds now and the dangers as I see it of trying to select individual shares.
There are still lots of ways you can make a mess of picking funds too, and that’s something I cover in much more detail in my Money Masterclass, along with if you are going to insist on picking shares, at least a few guidelines to avoid making the worst mistakes.
So if you’re at that stage, it may be worth considering.