Where we are

The whole drive of this site is to help you understand, and make, ‘risky’ investments. We have focussed on equities as being the core - and perhaps the only - asset class in your portfolio. We have encouraged you to start with widely-diversified low-cost funds. We have suggested you might venture into buying individual shares as you gain experience.

But we have been ambiguous about encouraging you to do so. The reason is this:

• Companies are ultimately controlled by their shareholders. Active engagement by shareholders is important for restraining executive pay and encouraging companies to act for the good of society as a whole. When you invest in a fund it is the fund that is the shareholder. You have no ownership rights in the shares that the fund owns on your behalf.

• This is a governance weakness which is avoided if you became a direct shareholder in individual companies….

  ……but…..

• The system of share ownership in the UK denies individual investors shareholder rights. When you buy an individual share through a broker or platform it’s the broker who owns ‘your’ shares, not you. You are named as a shareholder but you are not.

If individual investors were real shareholders we would strongly encourage individual share ownership. As things are it is optional.

Beliefs and assumptions

Let's review what we know, with the links to those pages that explain these points:

• Investing is a betting game. Nothing is certain. You are trying to take bets which give you the best expected return consistent with your tolerance for risk. Investing or Gambling?

• You don't know more than the market. You don't know how to pick stocks.

• The market is dominated by professionals. So the average market return is achieved by the average professional. The Fixed Sum Game, Average is Good

• Some professionals are better than average and some are worse than average. But there is no way of telling which are which. Data Games, Persuasion, Hype

• The average pooled investment will underperform the market. That is because the average pooled investment without costs will perform in line with the market. But the cost drag will lead, on average, to underperformance. Do Costs Matter?

Our view

We believe that individuals, having made the decision to invest in equities, should be much less frightened of direct investment. Because:

• Stockbroking costs are now so low that it is cheap to buy small quantities of shares.

• You learn little from owning a fund. You learn a lot from owning real companies. If you buy a few shares, particularly when you are young. you learn the process. And, particularly, you learn something about yourself and your reaction to occasional large losses and gains.

• Most people know one or two companies where they have a genuine edge over the professional investor. Fashion-conscious shoppers, for example, might have sold Marks & Spencer ahead of the professionals on the way down and bought ahead of them on the way up.

• There is no harm in picking a company share just because you are interested in what it does (but stay within the FTSE350 or its international equivalent). The share price already reflects the consensus view of people who are much more knowledgeable than you, so why prefer one rather than another?

• One study in the US showed that "bad" companies have been more profitable for shareholders than "good" companies (so long as you bought them when they were believed to be bad). Average Is Good

• Endless studies have shown that the average fund underperforms the average share. Therefore, if you are guessing, guess a spread of shares.

• Funds are boring. Isn't it more fun to put money into a real business that you can read about and even experience as a customer?

You may feel uncomfortable with random stock picking. It seems irresponsible somehow. But you know even less about picking funds or other pooled investments. So why elect to spend management fees and operating costs just to make a different guess? Isn't that even more irresponsible?

But always remember diversification.

What else you should do

To maintain your discipline, do not read the business news. Or, if you do, treat it like an amusing soap opera. Which is what it is.

Next

That's the end of ‘Hard Money’. If you want to go further, it can be a fascinating subject. But we doubt if you'll do any better. The number of people who believe they can is quite large. The number of people even capable of measuring if their performance is better than random is very small (it's a very difficult technical subject). The number of people capable of performing consistently above average is very, very small indeed.

If you haven’t worked through the Warnings module do so before leaving.

Good luck!