Learn About Investing
You can invest in something directly or you can invest in it indirectly. It is useful to be aware of this distinction.
Take gold. You could go out and buy a gold coin and keep it at home. This is a direct investment that you physically own.
Alternatively, you could buy shares in a fund that specialises in buying gold, on the behalf of all its investors. The price of the fund should – approximately at least – reflect the price of gold. Here you own the underlying asset indirectly. You don’t own gold. You own shares in a fund…that owns gold.
Direct ownership includes buying a property or shares in a specific company. The advantage is that you are close to what you’re investing in, able to know exactly what it is and control it more closely.
The disadvantage is that it can be time-consuming maintaining a diversified portfolio. To do research on individual investments and trade them can require significant effort.
What’s more, making sure you have the right balance of investments requires a degree of financial knowledge and expertise.
Also, some individual investments can be prohibitively expensive. For example, if you wanted to invest in residential property, prices may only start from £50,000 or more. A lot more if you fancied a house in central London.
This involves giving your money to someone or something else – that invests it on your behalf. A very common way of doing this is through a fund or Investment Trust.
An indirect investment in property, for example via a Real Estate Investment Trust, helps get around the problem of high minimums. Such funds might only require a few pounds invested up front, rather than £50,000 or £500,000 needed to buy a whole house.
Advantages of indirect investing (such as a fund) include the ability to diversify your investments and access financial expertise with relative ease.
The disadvantage is that by introducing a middleman, you introduce new risks. In the case of an active fund, are the people running it doing a good job? Another issue is that the service of such intermediaries isn’t free. The fees they charge will be a drag on performance.
Direct investing can make sense for those comfortable with what they are getting into and the amount of time it takes to do the necessary research. This route provides the highest level of control over your financial destiny.
Those with less time, interest or expertise may prefer the indirect route. That said, there is nothing stopping you mix-and-match, by holding direct as well as indirect investments.