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Investment decisions may come down to a controlling influence

ONE of the perennial discussion points among investors and advisers is trying to decide the best way to invest in the stock market. Should you buy shares directly through a stockbroker or invest in managed funds?

Both approaches have some compelling attractions and the final answer will generally depend on the preferences of the individual investor.

Macquarie Financial Service’s strategic financial planner Stephen Padbury said one of the main attractions of buying shares directly was that it gave the investor greater control.

They can select the specific stocks that sit in their portfolio. They also decide when to buy or sell, and whether to buy and hold or adopt a more active trading strategy.

Mr Padbury suggests $50,000 is the minimum amount needed before individuals start investing in shares directly. This figure is based on two factors – diversification and cost.

On the first point, he recommends that investors hold “a minimum of eight to 10 stocks, and preferably a few more” to achieve sufficient diversification.

JBWere’s WA manager, Ron Bennetts, concurs with this view, suggesting 12 stocks is a reasonable minimum.

On the second point, Mr Padbury suggests that people invest at least $5,000 in each stock. If they spend less, the brokerage will make an unreasonably big dent in their investment.

The minimum brokerage at full-service brokers ranges from $80 to $100, while most Internet brokers charge about $30.

People investing directly in shares need to be prepared to put in sufficient time to manage their portfolio.

This includes monitoring corporate actions such as dividends, rights issues and bonus issues and handling the paperwork.

They also need to recognise that ‘earnings surprises’ can have a dramatic effect on their portfolio, depending on the degree of diversification.

For many individuals, investing via managed funds is a better option. The potential benefits are clearly illustrated by looking at one of the most popular funds, Perpetual’s Industrial Share Fund.

It holds more than 80 stocks, providing very broad diversification, has returned 13.75 per cent per annum over the past 10 years and the minimum investment is just $2,000.

In other words, it has been a lucrative investment and is easily accessible to individuals with limited savings.

Of course, investors need to be cautious, since there are dozens of other managed funds that have produced lower returns.

Investors also need to look carefully at the investment style of different fund managers to determine which is most appropriate.

For instance, one fund manager may be an active trader and will realise substantial capital gains each year.

A second fund manager may derive most of its income from franked dividends.

The two managers may make the same pre-tax distribution to investors but the after-tax returns would be vastly different.

Mr Bennetts said the tax complexities was just one reason why investors should develop a strategic financial plan before they start investing.

The plan would include an overall strategy and a structure for their investments and would influence subsequent decisions.

For many investors, a mix of direct investments and managed funds is the preferred option. This is particularly the case for investors putting money into international shares.

While it is possible to invest directly in international shares, the managed fund option is generally simpler and easier.

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