Wednesday, January 14, 2009

Why not Individual Funds?

To answer Kenneth's question in the shoutbox, I think that for the time being, an ETF or index fund will give me the best value for money. Why?

1. Diversification for cheap. By investing into ETFs or index funds, I'm investing into a whole basket of different stocks (albeit small slices of different stocks). If I wanted to cover the same kind of ranges with individual stock, I would have to spend a LOT more money.

2. Lack of time/knowledge. I think I probably know the companies I work with and hear about but that will only cover 2-3 industries. That's not sufficient for diversification of risk. I would not want to invest in stock of companies/industries I don't understand, but I don't have the time to research and track every single one. By researching the ETF/IF, I can see what their investment ratios across the industries are, I can see what are the top 10-20 stocks they invest in and that's a less time consuming decision to make I think.

3. Cost of transactions. To invest in stock, every stock I purchase will have a brokerage cost. To get a diverse basket, I would spend a lot more on brokerage cost than if I were to buy an ETF. IFs are even cheaper in that sense.

2 comments:

Anonymous said...

With regards to diversification, that might be the case if you were confident in the probity of the fund manager, but there might be hidden diversification risks in the case of window dressing (http://www.investopedia.com/terms/w/windowdressing.asp) for example.

Oh btw, same pronunciation, different meaning -> homonym

Anonymous said...

...sounds like you can be an MBA student already. A bunch of ppl from my class can't stop talking abt stocks and investments.

I just go O_o??