The Investor Stakes - How Big A Risk Can You Afford?
- Author: Tim Morgan
- Published: 21/12/2007
How much of a gambler are you when it comes to investments? If you seek advice from IFAs (Independent Financial Adviser) they will get you to fill in a questionnaire that tells them whether you're someone who prefers low, medium or high-risk investments. Then they will advise you accordingly.
These days quite a few of us are going an extra step and selecting our own investments. That's because, if you know what you're doing and have the time to do it, then the big rewards often come from playing the stock markets yourself.
However, with big rewards come big risks. That's why most people still invest via unit trusts, investment trusts and investment bonds, letting professional financial advisers manage the funds. These pooled investments (also known as 'collectives') are generally lower risk. Ah, but what about those rewards?
So, is it just a matter of paying your money and making your choice? David Perry and John Wake, two of Alan Boswell's independent financial advisers, have picked up their arms and sharpened their wits to duel over the two sides of the argument. This time David is fixing it for the unit trusts and other collectives, while John is playing devil's advocate for the DIY investor.
David
Unit trusts and other collectives are a really economic way to buy quality investments management. This means that your money will be looked after by people who know what they're doing: not just what to buy, but when to buy - and when to sell, too.
John
Unit trusts! Forget them. You want some excitement in your life - and you want your money to work as hard as possible. By selecting your own stocks and investments you get personally involved, there's a real thrill to it. And the rewards can be much bigger, if you get it right. Personally, I get a great buzz when those stocks go up - there's nothing like it.
David
That's great while they're going up. But I'm guessing the 'buzz' becomes more of a 'phut' when they go down! Unless you're mega-wealthy you need to spread your risks. Even a medium-sized unit trust will have 40 or 50 separate investments. If the worst happens and one fails, it won't be catastrophic.
John
Yes, but unit trusts and the other collective investments just mirror the market - which is fine, if all you want to do is as well as the next man. But if you want to give yourself a chance to do better, then the biggest rewards are through doing it yourself.
David
So long as you've got plenty of money in the first place…
Speaking of money, investing in the collectives is cheaper than doing it yourself. Dealing costs are lower, because buying and selling small parcels of shares is inherently expensive, plus administration is easier - for example, the tax return is simpler.
John
Tax returns! You're fixated on being dull!
Want to know another way that DIY investments can make life interesting? You can invest in areas that interest you or that mean something to you. It makes sense, too - for example, if you know about a particular industry then you'll be able to use your specialist knowledge and expertise to help you maximise your investments potential.
David
That works as long as you're keeping abreast of developments - if you don't then you could miss something and come a cropper. For example, Northern Rock - you'd have needed decent industry knowledge to have predicted the fallout there.
John
But as a direct investor you become a member of the company, you get directly involved. You receive company reports, you can attend meetings and vote on things that actually matter. You can make a difference. It can be fascinating!
David
Calm down, calm down….
John
And you certainly won't ever be short of investments to consider - there are a huge range of different companies you can look at - on the London market alone there are over 2,300 stocks you could invest in, plus another 700 on the Alternative Investments Market.
David
If it's choice you're after, there's an enormous choice of funds, too. And there are plenty that specialise in particular areas, for example in sustainable companies and ethical stocks, or commodities and smaller companies funds.
John
That hardly compares to the thousands of options for the DIY investor.
David
Ah, but what about overseas markets?
John
You certainly need to know what you're doing if you invest overseas!
David
My point exactly - the fund managers DO know what they're doing. Collective funds offer easy ways to invest in overseas markets. Doing that as a DIY investor is much harder. Yet some of the very best investments are in overseas markets. Investors avoiding areas like China and India this year would have missed out on some excellent gains. And the economies that are likely to grow the quickest are the emerging markets rather than the developed ones.
Referee
So what's the answer? Assuming you're convinced that investing in shares is for you, should you buy unit trusts or other "collectives" such as investment trusts and investment bonds, or buy individual share holdings?
John
If you have the knowledge and the time, and find the idea of a high-risk investment strategy attractive, with potential higher rewards but also greater losses, then you should consider doing it yourself…
David
And if you want your investment managed by a professional team who will do their best to maximise your returns, take the 'collective' route and find out about unit trusts and other pooled investments.
More Information
Nothing in this article should be considered personal advice. Bear in mind that stocks and shares values can go down as well as up, whether you are a direct investor or buy through a unit trust or similar fund. For advice, talk to one of our independent financial advisers. If you'd like to contact John Wake or David Perry then call them at the Alan Boswell Group on 01603 218000 This article first appeared in the EDP December 15th 2007
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