Are You A SHARE Or FUND Person?

I’ve been investing actively over the past 5 years. I hold a range of shares and funds in my portfolio which is now producing a healthy amount of dividend cash flow and capital appreciation. The dividend in fact is a core pillar of my passive income stream.

When I started out in my investing career, I primarily focused on (mutual) funds. However as time progressed and I became more proficient, I gradually switched over to individual shares.

Now my portfolio is 85% shares and 15% funds.

What’s the difference?

Most people have heard of shares. They are tradable securities that represents ownership in a company. If Company A issued 100 shares in total and you bought 10 of these, then you own 10% of the company.

Funds are not so different.

You are also a shareholder in a company. The only difference is that the company buys and holds shares in many other companies. This means indirectly you become the shareholder of these “many companies”.

The key differences are:

  • Funds offer better diversification: it can hold hundreds of different shares which can reduce portfolio volatility
  • Funds are cheaper to buy: to achieve the same amount of diversification as fund in you share portfolio, you will have to buy hundreds of shares, incurring thousands £$ of trading costs. Funds can often be bought for free.
  • Funds can be expensive to hold in the long-term: funds are managed by professional managers who need to be paid and this ranges anywhere from 0.1% of your investment all the way up to 2%! This means the investment will have to generate at least “management fee + inflation” in order to maintain the same level of purchasing power.

3 reasons why I invest in shares

Investing in shares can be both fun and challenging. Here are my reasons.

1. I love stock picking

I often compare stock picking versus fund investing as the difference between being a wild and domesticated cheetah.

Both needs feeding. The wild one will actively venture in the savanna stalking its prey patiently before making the kill, whereas the domesticated one will simply wait for food to be placed in front of him.

Both (hopefully) will get fed. The wild one however might make a massive catch (or nothing) whilst the domesticated one will always tend to eat the same portion but with consistency.

In all seriousness, picking individual stocks requires extensive and thorough screening and evaluation of the various companies. At the same time I have to wait patiently to find the appropriate price level before buying.

Personally I love understanding how different businesses make a profit and I view the process of stalking patiently for the right price point as a test on my will. This is why I enjoy investing in individual shares over funds.

2. Cheaper to manage in the long run (better return prospect)

Investing costs moneys. That’s a fact.

  • When trading shares, you incur commission (between £5-11 per trade).
  • When holding funds, you pay an annual management charge and other transaction costs (aka total expense ratio or TER), which is often a % of your portfolio value.

The beauty of holding individual shares over funds is that the transaction cost is a one-off rather than recurring, which prevents the cost from compounding and eroding your return.

A 1% TER may not sound like a lot in a year but when this is levied on your growing portfolio year after year, it can have an enormous impact on the end value of the investment due to compounding.

An additional 1% cost on your portfolio could mean the difference between retiring now and 10 years later thanks to compounding

3. Greater accountability

I’m fairly sure this is entirely psychological but it definitely impacts my wellbeing so it is a reason.

Like #1, I construct my share portfolio, I decide what to buy (and not to), I choose the asset allocation.

I am responsible for every decision that relates to my portfolio.

Consequently I am ultimate accountable to myself for the performance of that portfolio.

This means:

  • When a stock increases in value: my research has paid off
  • When a stock raises its dividend: I picked a stable and profitable business
  • When a stock price tanks: there was a flaw in my original investment thesis

I have no one to congratulate or blame but myself. I am in control of my own destiny.

However this is not the case when investing in funds because the only responsibility I hold is deciding to whom I should entrust my capital to. I could not be responsible for any of the subsequent investment decisions nor in any way influence the outcome.

Some people might enjoy the hand off approach and the freedom this could bring but it is simply not my style. I strive to control and master my own destiny (after all this is the entire rationale behind WealthyBy40).

Why I still hold some funds?

Despite my preference for shares, I still hold about 10-15% if my portfolio in funds because this represents a natural domicile for my regular savings.

On any given month, I’m contributing £800-1,000 into my retirement account and I normally want it to be invested straightaway (I advocate for time in the market rather than timing the market). Even making a single share trade would cost me £11 with my broker, which is at least 1% of my contribution. This is crazily expensive. As a result I simply buy funds for free and use its automatic investment functionality so that my entire account is now on autopilot.

I only buy index funds, which essentially tries to mimic the market average index rather than trying to actively beat its performance. They are boring, plain vanilla but super cheap (0.09% TER) and have delivered decent long-term return (well in line with the rest of the market).

An added benefit is that my fund portfolio serves as a benchmark for me to gauge the performance of my share account. It delivered an unbiased verdict on my stock picking skill every year!

Wrap up

I think shares are great if:

  • You have a large amount of capital (Min £50,000 but ideally £100,000+)
  • You love stock picking and have conviction in yourself
  • You are willing to be accountable to yourself

Otherwise funds is a perfectly legitimate alternative and it still ensures your capital will be working hard for you.

Are you a share or fund person? As usual please comment away.