With the market particularly volatile this year, investors can be forgiven for looking to buy into assets with a ‘safer’ reputation.
But the price of gold, the traditional safe haven, has also fallen, leaving investors turning to a new source of relative risk-aversion, exchange traded funds (ETFs).
Put simply, an ETF is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund.
It is seen as an alternative proposition for those looking to play it safe, rather than stock pick.
Nevertheless, Gina Miller, founding partner of financial services firm SCM Private, warns there is no such thing as a safe bet when it comes to investing.
“There is a misconception that ETFs are simple and actually as with any investment product you still need to look underneath the bonnet and make sure you understand exactly is being held,” she said.
What you do get with an ETF, however, is much lower costs, much better diversification and much more liquidity, which is helpful in a volatile market, she added.
But, while you can “hold almost anything in an ETF” these days, traditional stock picking still retains some appeal.
It is because the one big benefit to hand picking winning shares is that the rewards can be so much greater.
For example, FTSE100 stalwart Ashtead (LON:AHT) was worth just 4p per share in 2003, yet is now valued at more than 1,115p, a 3,900% return on investment.
Mark Dampier, research director at Hargreaves Lansdown, however, highlights that the above example is unfair because most investors likely would have sold their shares by now.
He points out that for stock picking the human element is the main flaw.
“The problems around private investing is much more to do with human nature and people’s own psychology than the markets themselves,” he said.
“People make emotive decisions very quickly and I think people that trade shares tend to do that a lot more and trade too much.”
Indeed, he suggested, that investors are usually happy to sell once they have doubled their money, with very few willing to stay the course.
Meanwhile, investors who choose to invest in funds have an average length of stay of around four years.
Whilst he reckons this is still too short, Dampier says it is significantly longer than stock pickers would hold for.
He says the private stock pickers are now trending more towards day traders.
Regardless of what financial instrument they buy, Dampier believes investors must be willing to invest for a longer period of time to see higher returns.
Similarly, SCM’s Miller doesn’t discriminate between ETFs and stock picking.
While there are merits to both, “the bottom line is if it’s an ETF or stock picking, whatever you are doing, you still have look at the fundamentals and do your homework,” she said.
“You need to balance cost risk and return, that’s why it’s really important to look beneath the bonnet and know exactly what you are investing in.”