Which Should I Choose? Shares or Funds?
Are You a Trader or an Investor?
What’s the difference between the two? As a financial adviser, I often hear that shares are better than unit trust. Generally, people say they prefer to trade company shares on the stock market. No doubt they might have experience with trading, and many who made their riches from the stock market would recommend that others also trade in stock.
But before deciding to accept that advice, you need to understand the type of investor you are. Are you a trader or an actual investor? Do you buy and sell solely on pricing (which is what traders do—buy low; sell high) or do you invest for growth? Which market is more suited for you? Well, for starters, let’s consider the following.
What Is Your Investment Time Horizon?
This, by far, is the most important question everyone should ask themselves before investing in anything. Are you looking at using the money in 20 years, 10 years, 5 years or in a matter of months? Or would you prefer to keep things liquid at all times? Why is this important? Because the time you are willing to wait will determine how much risk you can take. The longer the time, the higher the risk.
Traders need very little time. In fact, they practice hit-and-run-style investing. They earn money fast then exit—the sooner, the better. To them, stocks are inventories that will rot in warehouses if kept too long and will increase their exposure to risk, hence a why a quick escape is ideal for traders.
This is why if you have only a few days to trade or you prefer to keep the money liquid, then trading with shares will naturally be preferred over unit trust.
Investors, on the other hand, focus on the potential of companies or products. This strategy is better known as value investing. They tend to have longer investment timelines and will see stocks or trust funds through their growth over time. Due to the diversified nature of funds (be it mutual funds or unit trust funds), price fluctuations aren't as aggressive as they are with equity shares.
This strategy is usually favored by investors who wish to grow their nest egg over a longer period of time. A good time frame would be somewhere between 15 and 20 years. This is due to the short term debt cycle which occurs—in today's context—every 8 to 10 years or so.
So, determine how long you wish to keep your portfolio. This will help you ascertain which risk category you belong to and which strategy—trading or investing—is better suited for you.
In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.— Benjamin Graham
What Kind of Investor Are You?
Do you play to not lose or do you play to win?
If you're investing for growth, you'll need focus. Focus on a particular company, a region or an industry.
But do take note, focus is risky business and although you have all to gain, you have all to lose as well.
If you play to avoid losing too much, then you must know that you won’t gain too much as well. It’s the fact of life.
No pain, no gain.
And if you’re an advocate of the old adage,”don’t put all your eggs into one basket”, then you’re probably a safe investor.
Safe investors look for diversification, which is the essence of funds.
Funds diversify by holding a "pot"of securities, bonds, money market instruments, derivatives or other forms of assets.
Investors can choose based on risk profile and industry or geographical preference. It's really quite flexible these days and comparable to the variety offered in stock exchanges.
Are You Active or Passive?
When it comes to investing, do you take the chill pill or do you constantly stare at the screen for ticks in the market?
Traders need to stay on their toes at all times since they’re price sensitive and they don't intend to keep assets for long period of times.
Investors on the other hand prefers to free themselves from the worry while periodically updating on market performances and making necessary changes to their portfolio.
If you’re a passive investor, it will be wise to diversify your risk to avoid losing sleep or risking a heart attack.
Do You Rely on the Opinions of Others When Investing?
Between stocks and trust funds there are the intermediaries.
You may have a trustworthy stockbroker that provides you with reliable information but unit trust funds are professionally managed by fund houses.
So how much do you trust the opinions of others?
If you don’t have the time to monitor the market, find yourself a broker or a fund house/ financial advisers with a good reputation whom you can rely on for investment tips and insights.
Warning: Though bad advice is better than no advice, do not rely 100% on anyone's advice pertaining to investments. Practice using your own judgement. Your profit or loss is yours and yours alone, no one will bear any responsibilities for your gains or losses.
A Recommended Read for Investors
I highly recommend to anyone who wants to save, whether actively or passively. This classic text is annotated to update Graham's timeless wisdom for today's market conditions. The Intelligent Investor
The greatest investment advisor of the twentieth century, Benjamin Graham, taught and inspired people worldwide. Graham's philosophy of "value investing"—which shields investors from substantial error and teaches them to develop long-term strategies—has made The Intelligent Investor the stock market bible ever since its original publication in 1949.
Over the years, market developments have proven the wisdom of Graham's strategies. While preserving the integrity of Graham's original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today's market, draws parallels between Graham's examples and today's financial headlines, and gives readers a more thorough understanding of how to apply Graham's principles.
The Intelligent Investor will not do his buying and selling solely on the recommendations received from a financial service.— Benjamin Graham
So Which Is Better for Me?
If you possess the propensity of a trader (short time frame, high gain/loss) then stock market is the way to go.
Otherwise, if you prefer diversification of risk and have a longer investment time horizon, consider investing in unit trust funds, mutual funds or exchange traded funds.
After all, funds are set up to satiate the hunger of investors looking for diversification.
Of course there are costs when investing in either, which I have covered in another post. So do calculate if such costs will offset your earnings.
What About the Risk in Unit Trust and Blue Chips Stocks?
Yes, we are all familiar with blue chip stocks. But are they really safe? For your reference, I have included the share price chart of Singapore’s largest bank, DBS Group Holdings Ltd.
Share price of DBS Group Holdings on Singapore Exchange (SGX)
Old timers favor blue chip stocks for their apparent “stability” and they rely heavily on dividend payouts for earnings.
But gone are the days where blue chips do not rise and fall like common stocks, they are after all, based on a single company.
As compared to Schroder’s Asian Growth Fund as shown below,
Unit price of Schroder's Asian Growth Fund
The Bottom Line
Although there are other funds available on the stock market, which I have also covered here, it really depends on what kind of investor you are and how long you intend to invest.
I have customers who made money from purely unit trust funds and I have friends who earn by going high risk with shares.
But these are 2 very different groups of investors and their investment time horizons differ by quite a number of years.
There are of course several strategies developed for specific investors to diverse their risk exposure.
Our best bet? Invest in both (50-50 to be precise) with little money and get a feel of how comfortable you are with each instrument before committing to either.
Don’t wet your feet without first dipping your toes. Happy Investing!
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Shawn Erasto