Investing in individual companies vs funds – what’s better?

Sharesies now allow their users to invest in individual companies listed on the NZX, New Zealand’s sharemarket. Going by the spectacular job Sharesies have done in making funds more accessible to Kiwis, this is sure to generate increased interest in investing in individual companies. So what are the pros and cons of investing in individual companies compared to investing in funds?

For this comparison, we’ll be looking at investing in the fund “NZ Top 50 ETF” (a fund invested in the 50 largest companies on the NZ sharemarket), versus investing in individual companies listed on the NZX.

Reasons to invest in individual companies

1. You have much more control

When you invest in a fund like the NZ Top 50 ETF, you have no control over what companies are contained within that fund. If you hate a company within that fund, too bad – you’re stuck with it. It’s like getting a box of Cadbury Favourites, and having to eat the Cherry Ripes that you don’t like πŸ™ .

When you invest in individual companies, you can choose exactly which companies to invest in, based on your preferences and investing objectives. It’s like having a box of Favourites that you get to choose exactly which chocolates are in the box. No Cherry Ripe for me thanks!

Now for some real examples where more control may come in handy:

  • You might want a safer, lower risk portfolio, in which case you might choose to invest in relatively stable companies like Genesis Energy and Spark.
  • You might want a higher risk portfolio, with potential for higher returns. In which case you might choose companies like a2 Milk and Vista Group.
  • You may like a particular industry sector. E.g. you might think the retirement village sector may perform really well because of our ageing population, so you want to invest in companies like Summerset and Oceania Healthcare.
  • You may dislike a particular company or industry sector. E.g. you might think the retail sector will perform badly because of increasing competition, so you build a portfolio that avoids companies like Kathmandu and The Warehouse.
  • You may simply just love a particular company. One of my very first investments was in Air New Zealand, just because I loved the airline and aviation in general. Although I admit this isn’t the smartest strategy for choosing what to invest in!

2. It can be more rewarding

When you’re invested in an individual company, you get to go along for the ride and follow that company’s achievements, challenges, and plans for the future. It’s like quietly cheering on your favourite sports team. While with funds, it feels like I’m investing in something so faceless.

In addition, you get to attend shareholder meetings and events (free food!), vote on important company issues, and participate when your company is raising more money to fund future growth. Not everyone will be interested in all of these things, but I can say that I’ve learnt way more from investing in individual companies than from investing in funds.

Reasons to invest in funds

1. Instant diversification

“Don’t put all your eggs in one basket” is a saying we’ve all heard. In the investing world, you probably shouldn’t invest all your money into one individual company – because if that company goes bust, you’ll lose all your money. You should invest in many companies in order to diversify your portfolio. It’s best to also invest in companies from various different industries, in case a particular industry performs poorly. For example, a portfolio containing Contact Energy, Genesis Energy, Trustpower, Mercury, and Meridian Energy isn’t a well diversified one!

Funds make diversifying your investment portfolio significantly easier as they already contain a collection of many companies (maybe even thousands). If you invest in the NZ Top 50 fund, you get instant diversification, as your investment is automatically spread across 50 companies, in a variety of industry sectors.

2. You don’t have to do much research

If you’re keen on investing in individual companies, how do you choose which company to invest in? You can always pick one you like the sound of (Air New Zealand in my case), but good investors should always do some research into a company before investing in it. This might include:

  • Reading a company’s annual reports and investor presentations to understand their achievements, challenges, and strategies for the future.
  • Thinking about the opportunities the company has to expand and grow.
  • Thinking about the risks the company may face e.g. more competition or lessening demand from customers.
  • Looking at the finances of the company e.g. ensuring they’re not overwhelmed with debt and have strong cashflows
  • Looking at the share price and measures like the P/E ratio to ensure you’re not paying too much for your shares in the company

With funds you don’t have to worry about picking companies and researching each one – you just have to decide on the best fund(s) to invest in to meet your financial objectives. That’s much easier!

Why not both?

There’s nothing stopping you from investing in both individual companies and funds. For example, you may invest in the NZ Top 50 fund to get instant diversification in the NZ market, but still really like a particular company or industry sector. For example, if you’re a fan of the retirement village sector, you could also invest in a company like Summerset in order to “tilt” your portfolio to gain more exposure to that sector, than you would by just investing in the NZ Top 50 fund alone. It’s like getting that box of Cadbury Favourites, and getting to add more of your favourite chocolate (like the Picnics πŸ™‚ ).

Personally, I invest in individual companies when it comes to New Zealand companies, and invest in funds when it comes to international markets. This is because I want control over what local companies and industry sectors I’m invested in, but at the same time I don’t want the difficulty of researching companies in overseas markets that I’m less familiar with, and the hassle of converting currency etc. in order to make overseas investments.

As for your strategy, that depends on your individual circumstances and investment goals. Even if investing in individual companies is not right for you, it’s still fantastic that Sharesies is opening up more options for Kiwis to grow their wealth.

If you’re keen to start building your investment portfolio with Sharesies, you can sign up with this link, and I’ll get $5 in my own Sharesies account. A great way to show your support for this site!

What’s next? Compare buying shares on Sharesies with buying them through a traditional broker.

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Disclaimer

The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.