If you have funds available to invest, there are various ways to do it. You can entrust someone else to do it for you, or you can invest directly. Ultimately the money usually ends up in the stock or bond markets. If you entrust someone else (which means via pension schemes, unit or investment trusts, OEICs, ETFs, or other “mutual” or “collective” investment vehicles), then you will pay management fees as a result. Those fees can seriously erode your investment returns – for example Money Observer magazine reported in 2010 that fund management fees eat away an average of 43% of investors returns over a 10 year period.

How can this happen? After all charges of 1.5% per annum (a common level of “management fees”) don’t sound much. But the problem is that the average dividend yield on the stock market might be 3.0%, and capital growth can be minimal over long periods of time. So that’s why half your returns may disappear. Not only that, the headline quoted management fee often understates the real charges incurred (trading costs and other charges are excluded). 

In addition, although it sounds like a good idea to entrust your money to “professional” fund managers who allegedly have the training and experience to make good investment decisions, this is a delusion in most cases. The average fund manager under-performs the stock market as a whole (mainly because of the costs above). That must be the case because most shares are held by investment institutions, so the universe of investment funds is managed by the universe of fund managers. There is little evidence that most fund managers have more skills than a monkey rolling dice, so picking a fund manager is an exercise in wishful thinking at best.

Can you do better, or at least no worse, as an individual investor? The view of ShareSoc is that you can, but you do need a little knowledge and experience to avoid the obvious errors and mistakes.  Indeed, if you have knowledge or business experience in a particular market sector, you may have specialist expertise that will enable you to outperform the professionals. 

ShareSoc tries to help you on the basics of sound investment management, and provide a forum where you can learn more. The ShareSoc Investor Academy offers a wealth of information, both for new investors and for those wanting to improve their knowledge and skills. Our newsletters, blog, twitter feed and company research feature help to keep you up to date with the latest information on the investment scene and offer investment ideas for further research. Our live events are also a great opportunity to learn more and exchange views with fellow investors.

Note that we are not decrying the use of collective investment vehicles where you lack knowledge of a particular area and where fund management charges are low. For example, many investment trusts have low charges and cover specialist sectors and foreign markets which you could not learn about and monitor without a lot of effort. So depending on how you value your own time, it may well make sense to use such funds to gain exposure to those areas.

Regrettably there is usually nobody selling you “direct” investment in the stock market whereas there are plenty of institutions and financial advisors selling you collective investments. Even stockbrokers often prefer to manage your shares for you rather than advise you on how to do it. The removal of direct investors also undermines the management and governance of stock market companies because the owners become “absentee landlords” where the agents who control the shares have no direct interest in the company’s success or failure.

In addition, the Government and other public bodies have encouraged collective investment rather than direct investment in recent years, partly based on the advice of the same institutions who benefit from it. For example, there are tax benefits for collective funds (no capital gains tax within investment trusts, tax benefits for ISAs which must be managed by institutions and tax benefits for pension schemes for example). We would like to see some of these faults rectified. Clearly these factors must be taken into account when investing directly, but they do not detract from the basic message that direct investment can be more profitable.