Why Buying Shares is Bad for your Wealth

I’ve said before that to get long term returns above the rate of inflation on your money you need to invest in shares (equities) so why am I saying it is bad for your wealth now?

Investing in Shares

This is because I believe buying and holding individual shares is not appropriate for most people. I believe this for the following reasons:

1) Understanding which company shares are good value and provide opportunities for growth requires a lot of time, a lot of information and a lot of knowledge on how to interpret that information (detailed company accounts etc).

2) Once that information has been digested and a decision has been made to purchase the shares they need to be continually reviewed as new information comes to light that will impact the share price.

3) To have an appropriately diversified portfolio you will need to hold a large number of shares across a wide range of sectors (mining, retail, banking, pharmaceuticals etc). This means you will have to multiply the work involved to research and review one fund by a least ten to have a well diversified portfolio of shares.

4) There is no such thing as a ‘dead cert’. Financially sound companies that are darlings of the stock-market can very quickly lose value, if not vanish entirely. Think of BP and Lehman Brothers as recent lessons.

If you thought by the title that I didn’t believe investing in shares at all I (intentionally) mislead you. If you are looking to invest for the long term (longer than five years) investing in shares to some degree is an important way to receive real returns. But, rather than buying shares directly, I prefer to invest in investment funds (also known as collective investments, Unit Trusts and OEICS (pronounced “Oiks”)).

Funds provide the opportunity for investors like you or I to pool our money and have a fund manager make decisions on our behalf on which company shares to buy and which to avoid. These fund managers and their teams have the expertise, experience and resources at their disposal and so, in return for an annual management charge (which should be between 1.5% and 2%), we may expect them to get a better return than by doing it ourselves.

You have the option of choosing a number of fund managers who specialise in investing in the different asset classes and geographic regions so that you can further diversify your portfolio.

Of course, the fund manager you employ can get it wrong so it is important you conduct some research ahead of making an investment and review your portfolio of funds at least annually. You should look beyond merely performance but also at the fund objective, the risk that is being taken to achieve the returns and charges amongst other factors.

There is a school of thought that believes that all fund managers underperform over the long term so you are better off tracking any given index (also known as passive tracking) but this is for another blog.

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Picture courtesy of bensmawfield via Flickr.com

 

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