1. You get a professional fund manager. As we are talking about a stock versus fund comparison for retail investors, and not for Warren Buffett and his mates, the professional fund manager is useful for getting us close to "The Market".
2. Economies of scale. Generally speaking, fund management fees are cheaper than paying stockbroker fees for individual transactions.
3. Diversification: our fund manager will buy a number of different stocks in a given market. A good stockbroker excels on ‘specific stock selection' and is not looking at the market, he/she is looking at performance. Stan Lock, at Brewin Dolphin tells me that for every $150,000 invested he would buy four stocks. A fund manager would make a much (much) more diversified play with the same amount of money.
4. Trackers and ETFs are a "cheap" way of obtaining market performance...subject to tracking error.
Why invest in individual stocks?
1. For those who understand the risk, stocks offer superior returns. And the potential of bigger losses. As we are discussing the comparison of stocks against funds in respect of retail investors, the play into stocks should be limited (say) 10 per cent of a portfolio.
2. The retail investor needs to weigh up whether his/her real aim is "market performance", or is it more? If it's the latter, the risk reward ratio needs to be fully understood. Additionally: Some thought should be given to Eugene Fama's Efficient Market Hypothesis, as Wikipedia says: "Economic profits cannot be wrung from stock picking. This is not to say that a stock picker cannot achieve a superior return, just that the excess return will on average not exceed the costs of winning it (including salaries, information costs, and trading costs). The conclusion is that most investors would be better off buying a cheap index fund".
But then, the likes of Warren Buffett are not presumed to be reading this, and will have a different take on the subject.....importantly, from the prospective of a professional (not retail) investor.
The writer is chairman Mondial and Financial Partners. Opinions expressed here are the writer's own and do not reflect those of Gulf News. Please consult your financial adviser for investing in stocks and funds.
