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Index Funds, Unit Trusts or Individual Stocks – Part III

With so many options available to investors, choosing the investment vehicle that suits you may be a daunting task. Investors who wish to build their nest egg for their retirement may not know where to begin.

With this in mind, I have decided to take a look at three basic investment vehicles available to retail investors. These are index funds, unit trusts, and individual stocks.

This series of articles is divided into three parts. In the first article, I had described the pros and cons of investing in index funds, while in the second article, I dealt with unit trusts as an investment. In this final part, I will take a closer look at the reasons to invest in individual stocks.

Managing your own portfolio

Managing your own portfolio can give an investor greater control of his investments and savvy investors may be able to reap greater returns than by investing in funds.

Key advantages

  • Greater control of your investments

By managing your own portfolio, investors gain more control of the kind of companies they are buying. This means investors can choose to invest in companies that not only suit their moral compass, but also in companies that they believe in personally.

  • No management fees

By avoiding any management fees that funds charge, investors already have a head start to beat the funds’ returns. Even though a 2% management fee may seem insignificant, it does add up over the years. To put this in perspective, Forbes reported in an article that on average, investors lose 40% of their investment returns to expense costs associated with funds.

  • Possibly greater returns over the long-term

Retail investors may not have the best track record when it comes to beating the index or even unit trusts’ gains over the last decade. However, investors who are diligent and remove short-term thinking from their investment decisions have a much higher chance of beating the index than unit trusts, due to the absence of management and sales fees.

Downsides

  • Have to constantly monitor your portfolio

Unlike investing in funds, managing your own portfolio can be a tedious affair. Investors need to constantly ensure that the stocks they invest in are performing within expectations and that the investment thesis still holds true as the years go by.

  • Most retail investors underperform the overall market

As mentioned earlier, most retail investors are unable to beat the overall market returns. This is due to short-term thinking, emotional investing or simply making poor investment decisions based on rumours or hearsay.

  • Diversifying your portfolio may be tricky

Funds provide investors with access to a wide range of stocks. If you invest in your own portfolio, you may struggle to adequately diversify your portfolio.

The Foolish bottom line

There is a multitude of investment options available to retail investors. However, savvy investors with time on their hand will probably be better off managing their own portfolio. Not only does it allow greater control of their investments but investors also need not worry about unnecessary and costly management fees.

At the same time, if they are unable to control their emotions while investing, and are prone to investment mistakes, then managing their own portfolio may not be right for them.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.