Index fund vs different stocks from different sectors

masamoah

Right
SO I have been investing for a few months and am trying to create a diverse portfolio. I have listened to the best investors and they always stress this.
Am I best off in getting 1 single index fund, which, to my knowledge has a wide range of sectors included?

Or am I best off getting several different stocks from several different sectors?

eskbanker

The simplest way for novice investors (including me!) to achieve diversification is to invest in multi-asset funds, which cover a wide range of sectors. Search for multi-asset products (on this forum or elsewhere) such as Vanguard LifeStrategy and similar products from Legal & General and Blackrock....

_pete_

I did both.

I had an existing 'pot' which I wanted to move into a diversified range of index trackers. An IFA selected some funds which reflected my risk profile and moved my existing savings into them. Since that date my new (monthly) contributions have been into a Vanguard Lifestrategy fund. As far as I can tell, the two approaches seem to be yielding similar growth.

dunstonh

Am I best off in getting 1 single index fund, which, to my knowledge has a wide range of sectors included?

An index tracker fund tracks an index. No index fund is diverse in the respect being mentioned unless it is a global equity fund. However, the risk level of such a fund is typically above the average UK consumer

There are different investment strategies and all have pros and cons. The most popular are multi-asset sector allocations. e.g. x% in US equity, y% in UK equity, z% in bonds etc etc.

You can either do this using multi-asset funds (where the fund manager does this for you based on their research and analysis) or you can build your portfolio of single sector funds and you decide how much goes in each (or use an IFA to do it based on the research and analysis they buy in).

nb0825

IMO, always go for an index tracker. These are managed funds by people who know what they're doing. Don't attempt to build your own portfolio of stocks you haven't done any research on and are not going to actively trade

nb73

eskbanker wrote: »

The simplest way for novice investors (including me!) to achieve diversification is to invest in multi-asset funds, which cover a wide range of sectors. Search for multi-asset products (on this forum or elsewhere) such as Vanguard LifeStrategy and similar products from Legal & General and Blackrock....

I would question the word "novice"

Otherwise agree fully

Linton

Funds may be invested in hundreds of different shares worldwide. Unless you were very rich and had a lot of spare time for research you would never be able to buy sufficient individual shares economically to provide equivalent coverage and diversification. And then there is the problem of ongoing portfolio maintenance.

bowlhead99

nb0825 wrote: »

Don't attempt to build your own portfolio of stocks you haven't done any research on and are not going to actively trade

I agree with 100% with that. You can't competently research 10000 individual stocks to find the good ones so you should invest very broadly, and then you run up against the problem that you can't practically afford the hassle and trading costs associated with investing in 50-500+ companies for broad diversification.

IMO, always go for an index tracker. These are managed funds by people who know what they're doing

That sort of makes sense, except a tracker is not at all 'actively' managed, it simply invests in company shares (or derivatives) in the proportions that those companies make up in an index.

As such, although it's true to say the manager organises and arranges for your money to be spent, the manager does not need to "manage" it - other than making sure the fund spends the new money coming in from investors in the exact proportions of the index, and sells in the correct proportions to fund redemptions without breaking the "weighting" of the index proportions.

As mentioned by Dunstonh, trackers are not generally designed to be held on their own, because they only "track" one narrow index at a time. They're designed to be held alongside other specialist funds (which might or might not also be trackers) to make up an overall sensible portfolio. So his suggestion to invest in a multi asset fund is generally much better than "go for *an* index tracker".

Certainly it is likely to be better to use a tracker for a particular area instead of picking just one or two individual stocks for that particular area, but remember to cover more than one area. Like for example FTSE100 covers big UK-listed companies so is better than just holding Shell and HSBC, but it doesn't cover any big French or German or Swiss or Japanese or US or Chinese or Korean companies, and doesn't have any car manufacturers or Googles or Apples or Samsungs etc.

Also, while a tracker is less volatile than an individually selected stock (which is just one company in one sector in one market) it is still pretty volatile and many people don't have the stomach for riding all the ups and the downs. By blending with other funds in other equity sectors and asset classes you will reach a level of risk and volatility you can stomach.

Pincher

You can do both and compare over time.


E.g. if you have £20k, use £10k to buy funds, and £10k to buy stocks.


If you can buy and hold for years, and don't have to pay any custodian charges, and just keep getting dividends by sitting pretty, I suspect you will do better buying shares. Funds have ongoing annual management charges.


Shares are more risky, sure, but if you have ten shares, and one of them goes bankrupt, is that actually that much different from a fund having a hundred different companies, and ten of them go belly up?

grey_gym_sock

Pincher wrote: »

You can do both and compare over time.


E.g. if you have £20k, use £10k to buy funds, and £10k to buy stocks.

with £10k for stocks, you're only going to be covering the UK. and not with that good a spread of sectors - 10 stocks isn't very many, even with each of them in a different sector - you really want at least 15 or 20.

what about the rest of the world? well, you could put the other £10k in funds investing outside the UK. though that gives you 50% UK, which is a bit high. and the comparison wouldn't tell you much - it might just be a decade or 2 in which UK stocks outperformed non-UK stocks, or vice versa.

If you can buy and hold for years, and don't have to pay any custodian charges, and just keep getting dividends by sitting pretty, I suspect you will do better buying shares. Funds have ongoing annual management charges.

OK, so does using £10k to buy 10 UK stocks save you money, compared to buying a UK fund?

well, not if you make the UK fund a FTSE 100 tracker, such as vanguard's FTSE 100 ETF (VUKE).

it's an ETF, so you can easily avoid custodian charges, the same as buying 10 individual shares.

the spread between bid and offer prices for the ETF is similar to the spread on individual shares (or, if you were going to buy any smaller companies, is less).

the ETF has on-going charges of 0.09%, so on £10k, that's about £9 a year.

but if you bought 10 individual shares, you'd pay 10 dealing commissions to buy, instead of 1 to buy the ETF; and it will be 10 commissions to sell eventually, instead of 1. at perhaps £10 per commission, that's a total of 18 x £10 = £180 more in commissions.

and there's 0.5% stamp duty to buy the 10 shares, none to buy the ETF. so that's another £50 cost.

so the ETF costs £9 more per year, while the 10 shares cost £230 (£180 + £50) more in one-off costs - over however long you hold these investments. in theory, the individual shares would start out more expensive, but becomes cheaper if you stick with this portfolio for more than 25 years. however, in practice there would probably by take-overs, etc, before the 25 years was up, forcing you to incur more dealing commissions to reinvest the proceeds of the take-overs. so it's actually doubtful whether the individual shares would ever be cheaper.

a few decades ago, ETFs didn't exist, and funds (even tracker funds) were far more expensive, and so the calculation would have gone the opposite way - the individual shares would have been cheaper.

Shares are more risky, sure, but if you have ten shares, and one of them goes bankrupt, is that actually that much different from a fund having a hundred different companies, and ten of them go belly up?

10 shares a not really enough to spread your bets. what if 3 of your shares go bankrupt? i doubt a fund would have 30 out of 100 go bankrupt (and not even sure about 10 out of 100).

and there is a bit to learn to get as diversified as you can by picking your own shares.

and how confident will you be in your own abilities, especially when it looks like your picks are doing badly (as happens to everybody sometimes)? would you panic, when you might have more confidence in either a professional manager, or in a tracker fund (in which there are fewer decisions to make, hence fewer decisions which can be messed up)?

Pincher

Knowing that you are a terrible stock picker is a very good lesson indeed. Jarvis 16 years ago was a heavy loss for me, but a very good lesson as far as I was concerned. If the comparison tells the OP he should go down the fund route, it's a good result as well. To assume buying stocks will definitely yield a poorer result is premature, though. £10,000 is the amount Sunday Times Money section asks experts to recommend how to spread across investments, by the way, and is a number people are likely to have.


You might do deals in tens of thousands, but I think one or two thousand are the sort of trade a lot of people are comfortable with.