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

When it comes to building your investment portfolio, there’s a dilemna many of us face at some point: should I invest in shares or funds? Peter Lynch, the American investor known for his meticulous, research-led investing style said: ‘know what you own, and know why you own it’. In other words, whether you’re buying funds, shares, or other investment instruments, it’s important to understand what they’re used for and their potential outcomes.

In this article, we explore the funds vs shares debate, with investing tips and tricks along the way, so you can build your portfolio with confidence.

What are shares?

Many people’s first experiences of investing 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. Dedicating a large amount of money to a single business is risky as even the most promising or well-established companies can come unstuck or experience misfortune.

It is also easy to get sucked into an appealing story. Blind luck or simply buying into a fashionable stock 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.

What are funds?

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.

This is why funds can offer a convenient alternative to individual company shares, allowing you instant diversification across a given area. Funds are either managed by a professional fund manager with a defined strategy or designed to simply track an index.

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.

The common dilemma: should I buy funds or shares?

But no matter where you are in the funds vs shares debate, it’s important to recognise there are major pros and cons for both. Lots of investors establish a central portfolio of funds with some shares on the side for more involvement (and fun!)

Buying shares allows you to truly tailor your portfolio to the companies and themes you are interested in, while collective funds can be a cheaper, less risky way to invest. This is because you’d be pooling your money with other investors, usually saving time and spreading risk. If you’re only investing a modest sum, funds could be the more advantageous option.

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 some 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.

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. All of this 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 create a diverse portfolio that works well. 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 may be nothing wrong in that provided it is money the individual can afford to lose – but not so if the sums involved are life changing.

What is an investment trust? What is an ETF? What is an OEIC? Find out more in our guide.

How many funds should I invest in?

Fund investors still face the problem of choice. There is a bewildering array – several thousand in fact. Our Direct Investment Service Preferred List 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 are worried about how many funds to invest in, and 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. As well as a starting point for investing in funds for beginners, they could also be a ‘core’ holding for more experienced investors, around which other holdings can be added.

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