A question many budding investors ask themselves is, “should I invest in funds or stocks?” Equities should form the basis of most portfolios geared toward a long-term financial goal. Getting equity exposure can be done in one of two primary ways: by buying equity funds, or by investing into direct stocks.
When you invest in stocks, you are directly purchasing a share of one company. Funds offer more diversification by packing several companies into just one position.
Many investors will prefer to build their portfolios around funds. These can be low-cost index funds (such as exchange-traded funds, also known as ETFs) or actively managed funds. Most actively managed funds do not beat the market, so the recent trend is towards a passive investment approach using index trackers. Be aware though, that these trackers do follow the market all the way down when it falls – not the case with an active strategy where a manager can exit a position easily.
Another option to consider is a multi-asset portfolio – this is an active strategy which has exposure to various asset classes, such as stocks, bonds, property and alternatives. The aim here is to provide steady growth with minimal need for investor input – this can be an ideal solution for most armchair investors.
It is a challenging and time-consuming task to build a portfolio out of individual stocks. To do this you would need to conduct extensive research into each company, and keep your knowledge updated. This means looking at company management, the sector and reading the quarterly reports. You’ll then need to repeat this process to build a portfolio that manages risk by diversifying across sectors, company sizes and countries/regions.
So, should I invest in funds or stocks?
It’s horses for courses, but most will prefer to go the fund route.
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