At the weekend I was reading the financial section of one paper and the writer was giving tips for what companies to pick and giving the rationale. Personally speaking, I think that this is way too risky and one that I would never take, simply because it is too risky. What they were recommending was company A , B, D etc and they gave perfectly good logical reasons why you should invest in that company, but they also added that the investor needed to do some research on the different aspects of what they were talking about. This means that the investor would have to go knee deep into the accounts and do a lot of research – and bear in mind that a lot of people cannot read accounts, whilst I can as I am an accountant, but I can tell you that this is hard work sometimes, and you would need a good knowledge of accounts to do this properly. The biggest danger, as far as I am concerned though, is that this is the kind of work that you need to do before you invest in just ONE company. What if you want to do 15 investments – that is a lot of hard work, and a lot of time as well, and basically this is not practical for most people.
As an IFA we invest in funds, and whilst the constitution of all funds varies according to the fund manager, most funds will invest in anything from 50 companies to around 100 – so the fund manager does all the hard work in going through the accounts and looking at each company. Moreover, they do this research regularly to convince themselves that they should keep their investment in place – and this makes the research aspect a full-time job. What we as advisers do therefore is look at the statistics of the fund itself and we track the most consistent and half decent performing ones – so that simplifies matters greatly.
I also spoke about risk – so if you invested £20,000 in company ABC Ltd and it faltered, and perhaps even goes into liquidation, then you could lose all of your money, and this makes it high risk. If you invested the same £20,000 in fund BCD, and one of the companies goes bust, then you could lose £20,000/60 = £333 and to a large extent this is bearable, and so in one fell swoop you can reduce your exposure to risk by a huge amount.
Investing in funds is easier than individual companies – and you can also reduce your risk by a very big amount.
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