FUNDS vs SHARES

Brett_Woods

My son is telling me that Shares will give me a better return than funds, with the market being what it is at the moment. Can anybody tell me if this is true? My IFA doesn't seem to think so, but he's broker does! Funny that

Poppycat

No idea why you think referral forum is the best place for this.

kingmonkey

This question is way too general to give a meaningful answer. I suggest you read up on investment strategies. Just type something like "how to invest" in google.

Aegis

Brett_Woods wrote: »

My son is telling me that Shares will give me a better return than funds, with the market being what it is at the moment. Can anybody tell me if this is true? My IFA doesn't seem to think so, but he's broker does! Funny that

Shares generally have more potential for large gains or losses than funds will. Funds by their nature diversify, so if the companies do well the fund will do well, but the stability afforded by this strategy means that the gains will not be as much as the top performing shares in the portfolio.

If you know you can always pick the best shares, then they're probably going to do better than funds. However, if you can't then you might prefer funds.

dunstonh

My son is telling me that Shares will give me a better return than funds

Thats a bit like saying that petrol is faster than a car.

Funds are a collection of shares, property, gilts, bonds etc. The multiple holdings in those funds will water down the potential somewhat but it also waters down the risk. For example, lets say over the years you picked Polly Peck, Marconi and Railtrack (to name a few), you would now have little more than a few pence left on your investment. Had you picked a FTSE100 fund then you would still have your investment and made money as they had 100-120 shares in the fund compared to your 3.

What if you pick a share that has limited potential at this time, say a builder but pick a fund that has good potential such as commodities or agriculture focused? Or the reverse and pick an oil company share against a bricks and mortar property fund?

So, in reality what your son is saying is right but also wrong.

purch

Individual holdings in Securities of any kind will always have the potential to give you larger gains than a Managed Unit Fund.

But as has been pointed out it also has the potential to give you much larger losses too.

The current environment does make it harder for Collective Investments to make gains in comparison to well chosen individual holdings, but because of this the risk and volatility on those individual holdings is much higher than normal too.

Browntrout_2

Brett_Woods wrote: »

with the market being what it is at the moment.

what it is?

The market is the market, it is a free market.

Brett_Woods

Sorry for the inappropriate choice of forums, this is my first time on any forum... Thank you for your advise everybody.

earlgrey_3

Brett_Woods wrote: »

My son is telling me that Shares will give me a better return than funds, with the market being what it is at the moment. Can anybody tell me if this is true? My IFA doesn't seem to think so, but he's broker does! Funny that

The real killer with unit trusts is the annual management fees plus other charges that are shared between the fund managers and your IFA every year.

If the return on UK equities over the next few years is 4% pa after inflation I'd be more than happy. But if the investment is in unit trusts, losing half of that after the typical TER (total expense ratio) of 2% pa is taken out looks far less attractive. If the investments go down in value as they could then paying the same charges looks even worse.

If you accept the "random walk" theory, just picking shares with a pin would give a better return than the average unit trust after fees. It's those whacking fees that are the problem holding back returns.

Holding shares isn't cost-free either. You'll have broker's fees, stamp duty and the market maker's turn (the spread) to pay. With a sensible strategy these should still be a heck of a lot less than UT charges. To make sense, in my view you need at least £20K to invest directly in shares, i.e. to have a decent spread of risk, make it cost effective, and to be worthwhile on time. It's also no good if you tend to worry every time a single investment moves in the wrong direction.

The downer with shares for some is the amount of time involved. It's OK if you enjoy it but bit of a drag if you don't. I my own case, I was trading very actively until a few years ago but then had less time and all that stuff took a back seat. The result was that my returns were a lot lower than they had been. This year for the first time I'm putting UT's in my ISA.

If you've less money or want less hassle you should also consider shares in Investment Trusts. See http://www.theaic.co.uk/. These are companies that hold collective investments like unit trusts but usually have much lower costs. If you intend to cover other than UK equities that usually means some sort of collective investment anyway. You could also consider UT tracker funds that can charge as little as 0.25% for management as opposed to the typical 1.50% plus other annual charges of managed funds.

dunstonh wrote: »

For example, lets say over the years you picked Polly Peck, Marconi and Railtrack (to name a few), you would now have little more than a few pence left on your investment.

Just for the record, that's not quite right. The RT liquidators for example have repaid shareholders 260.5 pence per share so far I believe with a final distribution due sometime this year. So if someone had only a single share they'd still have more than those few pence to rub together. See http://www.rtgroup.co.uk/investor_relations/return_of_cash.html

The offer price was 390p and smart investors could have sold at over £10 at one point. That's shares.

peawack

But, I don't think he meant unit trusts, did he ?