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First time investor - individual shares vs funds?
P Christou
Posted: 10 January 2013 10:23:32(UTC)

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Hi forum,

I wrote a detailed forum post but this can be summarized with the following:

- you're in your mid twenties
- £300-500 to spend per month in the market

What would you recommend, individual shares or a fund?

In depth:

I'm in my mid twenties and looking to invest some of my earnings into the market on a regular basis. I've spent the past week educating myself on the stock market. This has included reading many beginners articles, listening to pod-casts/watching videos etc.

After all this, I had a plan set out to invest in individual shares with companies I was aware of, had a good track record and companies that expected to grow/be profitable from 2013 onward. (I understand that a company being profitable doesn't necessarily mean its share price will increase but from research, it's a good indicator?).

Anyhow, I'm now a tad confused because I've read that due to trading costs, unless you're willing to invest at least £1000 at a time per individual holding, you're probably better off investing in a mutual fund. I believe it will cost £11.95 per transaction so I can see how that could quickly eat into funds. I've read that with limited capital, mutual funds will give you more 'bang for buck', portfolio diversification and an experienced investor essentially acting on your behalf. Correct me if I'm wrong but this is what I understand from research. I appreciate there are charges associated with mutual funds but lack the experience to know how much this actually eats into return?

With all this said, I'm able to invest £300-500 per month in the market and would really appreciate some advice on whether I'm better off going with individual shares or a mutual fund?
david madgett
Posted: 10 January 2013 12:31:21(UTC)

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Why not take a look at something like the Halifax Sharebuilder, which allows you to BUY (not sell) shares for £2 commission - though this is only on a set date each week. This way it makes it worth buying very small amounts of shares in individual companies and even some funds and investment trusts.

I've found it quite an effective way to build up profiltable stakes in companies, by being able to monitor share movements in companies I thought where worthwhile, and then adding small amounts when the share price seemed good.

Other banks also provide a similare service, eg, - they only charge £1.50 buying commission, but they only have one buying date per month, and I think this is too inflexible for me.

Hope this is helpful.
2 users thanked david madgett for this post.
P Christou on 10/01/2013(UTC), Leigh Moss on 12/01/2013(UTC)
P Christou
Posted: 10 January 2013 19:37:32(UTC)

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Hi David,

Thanks for your reply. I've looked into Sharebuilder and it certainly sounds like something that could be suitable.

The only disadvantage I can see is that like TDdirectinvesting, it sounds like you can only invest on a monthly basis instead of weekly? From the Halifax website: "Simply set-up an investment plan on one of four set dates each month and we'll do the rest."

I'd be fine with the ability to invest once a week but once a month doesn't seem too great.
simon bradley
Posted: 10 January 2013 20:23:16(UTC)

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First thing to ask is what are you investing for, income or growth? Do you have cash savings? What is you timescale for investing and do you have an end goal other than profit!
P Christou
Posted: 10 January 2013 20:56:22(UTC)

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Hi Simon,

Thanks for your post.

First thing to ask is what are you investing for, income or growth?

Would I be considered greedy/over ambitious if I said both? If I had to choose, I'd be leaning more towards growth.

Do you have cash savings?

Yes, I have cash savings and no debts.

What is you timescale for investing

Timescale for investing is long-term, 5-10+ years

do you have an end goal other than profit!

My end goal is to make sure at least some of my capital is working for me instead of it simply sitting in a bank doing nothing. Another goal is for me to pick up more knowledge/skills on the way - here's hoping this will come naturally!
Posted: 11 January 2013 06:08:18(UTC)

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If buying shares its not really worth buying less than £2000 worth as the buy cost is say £12 the sell cost £12 and the buy govt tax 0.5%, so the deal will cost you around £34 - about 1.7%.

The shares need to grow 1.7% to cover your costs, buying less than £2000 will increase your costs.

Funds - take care for total rip off funds, dont pay up front 5% ewtc by going through someone like HL etc who absorbs this.

Avoid funds with bid offer spread (although i have a couple like troy trojan and hl multi who have bid offer spread as they perform well)if you can, as this nicks 5%from you straight away.

As a rule I would not even look at funds with charges (TER) above 1.6%, and the growing fashiion is to go for trackers etc with very low charges as they invest in the same top FTSE firms as all the other funds. SWIP FTSE All share is good at low fees. ad high yeild.

The market is topside right now and heading for an almighty crash. Dont get caught buying at the top of the market, even with a long time horizon. Drip money in.

Look at the fund performance graphs on citywire etc over 5 years then 1 year then 3 months . You will see that even super dooper top funds that are supposed to be better than sliced bread may have not made a penny over 5 years., and theymax drop might be 40% or more. Is hard to find a fund that actually will make yo some money over your 20 year timescale, they will just rip you off for fees. Probably you could short list a dozen or so out of the 2000 plus funds available. Mostly they are crap.

Good luck

2 users thanked banjofred for this post.
Guest on 11/01/2013(UTC), Pensionable age on 11/01/2013(UTC)
Posted: 11 January 2013 06:14:34(UTC)

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Oh.... and diversication wont help you

Look at the graps - they all follow much the same pattern, When the market tanks they all tank, its just a question of how much.

Invesco perp high income gets top markets, perhaps as when it tanks it drops a lower perecentage than some others.

Generally, despite all the talk about defensive funds and defensive shares, when it goes red, they all go red, and you see 30% - 40% of your money gone forever - to make that back again requires growth of 50%+ which will take years.

Beware of the HL etc recommendations, you read the glowing recommendation then look a the graph and see that the fund has lost money for years.

Generally it seems a mugs game, and we are the mugs

3 users thanked banjofred for this post.
P Christou on 11/01/2013(UTC), Pensionable age on 11/01/2013(UTC), Guest on 13/01/2013(UTC)
P Christou
Posted: 11 January 2013 10:30:59(UTC)

Joined: 10/01/2013(UTC)
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Thank you for your detailed replies, your experiences are invaluable. From the posts, it seems like my options are as follows:

  • Shares: Invest in Halifax Sharebuilder and trade once a month and only get hit by a £1.50 buy charge instead of £11.95 - of course this has the disadvantage of only being able to invest at the set interval and I'll still have to pay £11.95 to sell. Will I also have to pay the govt tax of 0.05%? If so, I've calculated that if I were to invest £500, even with the discounted buying fee, the deal would still equate to 3.2%, investing £1000 would still result in the deal costing 1.8% so perhaps not the best route.

  • Mutual funds: Look for a fund with low expense costs (TER of < 1.6% - nice rule of thumb, thanks Banjo). I've noticed many funds have an 'initial charge' of £1000, I presume this means I have to pay £1000 up front? Also, does bid offer spread only apply to ETFs?

I had a look at SWIP FTSE All share but it appears that it's only available via HL. I believe they have a £2 monthly charge which would mean paying £24 a year before taking any of the other charges into account?
david madgett
Posted: 11 January 2013 12:26:32(UTC)

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Just to clarify - the Halifax Sharebuilder allows you choose a trading date - up to 4 per month - the non-ISA version allows you to trade 4 times per month , if you wish. The good thing is that you can make your share choice up to around midnight the day before trading, if you like. Some other banks versions are less flexible and require you to choose the shares a number of days before trading takes place, so you can't tell at all what price you will be paying.

The non-ISA version allows you to choose which of the dates offered even as late as the day before trading.

Hope this helps.
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P Christou on 11/01/2013(UTC)
P Christou
Posted: 11 January 2013 13:59:52(UTC)

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Thanks for the clarification David. Being able to trade 4x instead of the 1 is certainly more desirable. I think I'll go for the ShareBuilder.

This still leaves me with the dilemma of whether to invest in individual shares or funds?

With individual shares, of course there's more risk and unless the share price goes up, it won't cover the sell costs. If I go with a fund/trust, there's arguably less risk but this seems like the more sensible option when it comes to a long term strategy. I think I'm struggling because I'm just starting out. I guess there is no concrete 100% right answer, instead, just a 'better/smarter' way of doing things.

The information you've all given is much appreciated!
david madgett
Posted: 11 January 2013 15:07:23(UTC)

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'P Christou' - as one of the contributors has said, it depends on what your objectives are for your portfolio.

At £2 commission per purchase, this lends itself to building a sort of personalised unit trust. £300-500/month makes it easily cost effective to buy between 2-3 companies/funds etc per month - and you can change your choice of companies every week if you so desire. This gives the opportunity of building up an exceptionally large spread of risk (the spread of risk in this case is the risk of individual companies bombing, as opposed to a generalised fall, referred to by a previous contributor).

In my case my objective was to build up a vary varied portfolio of high yielding assets- usually shares - to act as pension income for when I eventually retire. So far - about 4 years into it - it has worked well for me, ie, it has met the objectives I had for it - ie, that it provide me a minimum cash income of 5+% yield. It was never my intention to make money through trading the shares (in which case commission rates become much more significant).

Cavendish Online
Posted: 11 January 2013 15:29:09(UTC)

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If you decide to invest in funds rather than individual shares and want to keep your costs down we would recommend reading this article:

Which? and Candid Money also have fund supermarket / broker comparisons:
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antigricer on 11/01/2013(UTC)
Steve P
Posted: 11 January 2013 15:30:09(UTC)

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"This still leaves me with the dilemma of whether to invest in individual shares or funds?"
It depends on the amount of risk you want to take on really.

Of the share investment options you mention:

1) Low cost tracker: lowest risk (high diversification, low costs) - will never underperform the market (apart from a small amount due to admin/operational costs) but will also never outperform it

2) Managed fund: medium risk (high diversification, medium/high costs) - only worthwhile if you choose a good fund manager (and you often only know this with hindsight)

3) Individual shares: (low/no diversification, low costs) - only worthwhile if you choose a good company to invest in (and again you often only know this with hindsight)
Posted: 11 January 2013 15:34:12(UTC)

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As someone in a similar situation (though I invest much less every month, but every now and then have a couple thousand spare to throw in)... I've been investing since my early 20s, and this is what I did:

I started off with a £1000 investment in Xstrata. Knew very little about them at the time, but it was recommended to me. I played with a virtual portfolio for a bit, too, looking at high yielding stocks and the big name players - groups like tescos, RBS, etc.

For a long time my portfolio was very flat, over the last two years (like many I guess), I've been very flat. The last 6-9 months, though, it's been a killing, throwing a 40% profit or so.

I did what many would advise at first, I had quite a diverse portfolio in a range of sectors (Tescos, ARM, Xta, ICAP, amongst others)... This was very flat profit, and my main reward was from dividends.

In the last 6 months or so, now that I feel more confident, I've broken my diversification to much smaller groups. I went with ARM, XTA, and SVT for a while, then sold out of SVT and moved that into XTA. My portfolio sits at 65% in XTA, 35% in ARM, and I've ridden one hell of a boost of late.

Too much diversification will kill you, as the 15£ commission I currently pay through rbs-sharedealing is quite alot. Certainly the only time I've gone in on speculative trades there was BP after the oil leak and Standard Chartered after their scandal recently. They paid off.

Stay confident, play the long game on shares, and dont sweat it when things dont go so well. If you can reason with yourself well enough to buy them as a long term plan originally, dont break the faith until you see news that actually changes that - ride market fluctuations and unless you have to, dont look to cash out unless you're no longer convinced of long term viability

I'm sure I'll get slaughtered for most of what I've said there, but like I said, it's worked for me, last few months have been a 30-40% skyrocket in portfolio value.
Posted: 11 January 2013 15:47:34(UTC)

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I'm in my early 30s and invest in individual shares, not on a monthly basis as commissions and stamp duty eat away at small purchases. I would recommend one quarterly share purchase, that way you also get to follow a company and have time to do some decent research on P/E ratios, dividend yields, EPS, performance against the market, competition etc. I'd also look at ETFs over funds - these have no stamp duty but make sure you are aware of the underlying index so you know what you're buying. Same applies here, give yourself time to look at earnings growth etc.
A Sick SIPP Owner
Posted: 11 January 2013 16:02:48(UTC)

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No disagreement with the info from banjofred.
My thoughts:

Your investment level is well within ISA limits - which should avoid income, and capital gains tax.

While a 'Pension' fund may seem attractive when putting ythe money away, you have to then consider the government limits and taxation loadings when you come to want to take from that fund - not just the ones you know about now, but whatever they decide to do next!

As detailed there is the current 0.5% buy cost that will get you every time you want to move from 1 share to another,
If you hold shares personally, you will have to manage the paperwork, and pay-in dividends, and do the paperwork for foriegn and UK taxation.
If you use a (bank) to hold the shares, then be careful about periodic charges calculated on the capital held.
However, you get to tell them your buy and sell wishes - on a 'now' or a 'today' basis, and not have to worry about finding/filing/sending-off/checking receipt of the certificates.
Not likely that they would re-invest the dividends without you going for at least the lower level of portfolio management.

That then leads to the sort of share dealing you will be doing - many changes as the market and individual sectors, or companies expectations change, or longer-term selections aiming for 3 to 5 years before review.
7% pa for 5 years seems OK at 0.5% BoE rate, and 3% inter-bank/inflation
But working hard you may yes MAY make 2% in each month by buying what is about to go up that month, and selling after they have risen.
1 error and you could lose years of accumulated increments and added capital investment.

There are funds that will allow you to hold substantial amounts in cash between selling and buying - but check what interest rate you will get on that cash

So - in the end it probably comes down to your trading/investment/risk stance and the effort you will put in.
And what investment management facilities you can find that fit your needs and pocked for charges.

andrew sutherland
Posted: 11 January 2013 16:46:24(UTC)

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How about a stocks & share ISA?

Likewise I mulled over shares and funds for a bit, but found the easier (lazier?) option to be a S&S ISA. It's given me good growth for the past few years, and with minimal charges and being tax efficient, it's a winner for me.

A Sick SIPP Owner
Posted: 11 January 2013 17:33:39(UTC)

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ISA is just a 'wrapper' for the investment that will avoid tax on the investment.
You would still have to 'select' the management mode of the investment

As in - a 'managed' investment where you purchase 'bonds' or 'units' in that fund, and the managers buy and sell shares etc with the invested money
Then you get to select the sort of companies etc that the money would be used to buy -
generalised investment set, specific markets - commodities, oil, technology backs, and localations Asia, USA, EU, and return types - income from dividends, or capital value increases

Going for the ISA mode avoids much of the need to consider taxation with financial planning of when and where, and how you receive your money (and profits) back out of the investment, and into cash in your personal bank acount.

Uncle Bulgaria
Posted: 11 January 2013 18:29:13(UTC)

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There's already a lot of good advice in the earlier appends. Given the amount you intend to save each month I would recommend a S&S ISA, and identify a smallish set of funds that you drip into monthly. Individual shares will be high risk in the quantities you'd be buying. I have both shares and funds and have done much better with the funds - despite all the negative comment you'll see about fees, etc. Equity income funds are a good staple, but also select some growth funds that you like the look of; emerging markets are an obvious area. The performance tables on the HL or Fidelity websites are a good tool for comparison. I tend to look for funds that perform amongst the best when times are good, and that don't lose too badly when the market slips. Look at 1 yr, 3 yr and 5 yr performance tables but beware of the longer timeframes as a fund may have changed significantly over these times - e.g. is the manager the same?
The most important thing is to be patient. As others have said above, the market has done well recently, which inevitably means it will suffer a correction. Be prepared to wait, holding back cash and only buy when the market looks like good value. You have to be prepared to lock in profits as well - which I find harder. You won't hit the peaks or troughs, but you'll get close and you'll get better at assessing when to invest and when to reduce.
Most of all it's actually good fun and very satisfying.
Good luck!
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david madgett on 12/01/2013(UTC)
P Christou
Posted: 11 January 2013 18:30:56(UTC)

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I already have a cash ISA so a S & S ISA could work hand in hand with my existing ISA. I'm with Halifax and have taken a look at their administration fees (there's an awful lot of them!) -

Some stand out charges include:

Stocks & Shares ISA admin fee 0.05% per month - min £2.16 + VAT, max £8.33 + VAT (paid half-yearly)

My understanding: 0.05% of any cash I have in the ISA will be taken monthly (up to the max)

Dividend reinvestment 2%, maximum £11.95

My understanding: They take 2% of any dividends up to a max of £11.95?

On top of those charges, should I invest in a mutual fund, I'll also have the TER to pay too? Oh and Stamp Duty Tax?

I'm in this game for the long haul and don't expect an instant return. I'd like to build things slowly. On a risk scale of 1-10 were 10 is suicide, I'd say I'd like to be around a 4.
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