Learning about shares: Prudent investing is all down to teamwork

Olympic champion and investment novice BARBARA KENDALL continues her six-part series on sharemarket investing.


A few years ago I was part of a course for kids at the Outdoor Pursuits Centre near Ruapehu, with a bunch of other New Zealand representatives from a range of individual and team sports.

It was a fun time, doing stuff with the kids to help them overcome physical fears and showing them the power of goal-setting. At one point they put the sportspeople into a team for a teamwork activity.

It was full-on. Getting through it meant everyone in the team had to contribute, big-time. I remember afterwards Black Cap Dion Nash saying how surprised he was that the individual sports people were so good in teams.

It was true, the individuals were more competitive. Every member of our team from an individual sport gave absolutely everything. The team players were more likely to sit back and expect the team to carry them every now and then.

I remember thinking that's exactly why I gave up playing team sports - I got sick of carrying the others who didn't want to win as much as me. Successful individual sports people are all ultra-competitive by reflex. We have to be. We operate to a brutally simple equation - slack off a millimetre and you lose.

Since I've been thinking about investing in the share market, I've noticed that there's a fundamental decision I need to make that brings me back to this same old equation - team or individual?

Should I invest via a managed fund or buy shares myself?

Yesterday I talked about the small investment Shayne and I already have in the Fisher Fund. I also talked about the Telecom shares that my nan bought me and her other grandkids as an investment when we were younger.

Inspired by nan, we've decided to invest some money in the share market for Samantha, 2, that she can access on her 21st birthday. Hopefully it will help her pay off a student loan. Not that there's any guarantee she'll be so sensible as to be studying. Both her parents at 21 were transfixed on crazier schemes, such as windsurfing the world circuit.

Whatever she decides to do, we've decided we want to get the share market working on her dreams for the next 19 years.

So, my question for Dan Dividend is:

Should we be investing in a managed fund or individual shares?

Dan Dividend responds:

This is one of the first questions to address when you're new to equity investing. Points to consider:

* Apply the principles of teamwork to investing. Whether you choose managed funds or individual shares - or a combination of both - the same core principle applies. Prudent investment involves building a diversified portfolio across a range of stocks to spread your risk.

Broadly speaking, the more investment experience and funds you have to invest, the more likely you are to opt for direct investment in equities rather than managed funds. Conversely, if you want to spread your risk across a wide range of equities - more than you could access on your own terms - then managed funds are for you.

* Diversify the individuals in your team. If you are investing directly in equities you have to be more active and involved in investment decisions. You can select any combination of stocks from a single industry sector, range of sectors or country. This will generally involve active third-party assistance, particularly from a broker or financial adviser. With managed funds you still benefit from expert fund management and stock selection, it's just that you are unlikely ever to come into contact with the people who actually manage the funds. Your funds will be grouped together with thousands of other investors' and managed centrally.

* Your critical choice - do you want to be captain of your team? If you're excited about the prospect of leading the process of making investment decisions with the help of your advisers, then you should choose the route of direct investment in equities. If you feel more comfortable letting others make the big decisions, and you're happy to trust the outcome, go the managed-fund route. In reality, many investors chose to combine both approaches - with a balance of managed fund and individual investments.

* Decide what kind of team you want. If you decide on the managed-fund route, there are some important decisions to make about the type of fund you want to invest in.

* A passive or an active fund? Passive funds track a market index, which means the balance of shares mirrors the underlying market. Actively managed funds are where investments are made at the discretion of the fund manager.

* An exchange-traded fund? Exchange-traded funds are, as the name suggests, traded on NZX's markets. There are four exchange-traded funds listed on the NZSX Market, including the NZSX 10 Fund, a passive fund that tracks the NZSX's top 10 companies.

* What's your risk profile? If you're risk-averse, look for a conservative fund made up of solid market performers. If you've got a high tolerance for risk, look for a growth fund made up of higher-risk shares with a higher chance of increasing in value.

* Email questions to Dan Dividend.

* TOMORROW: What is actually involved in buying shares.