Going solo has its risks and rewards

SHOULD part-time investors go it alone, or use a professional fund manager to pick stocks?

That depends on whether you think you have any advantage, says Alpha Wealth’s Keith McLachlan.

“Most retail investors don’t have that much time every day to do research, and they can’t compete with a professional who does this 10 hours a day and personally meets management teams,” he says.

Still, investors do have flexible time horizons, which means they don’t have to sell their stocks at any particular time or deal with liquidity constraints.

“Because their investment positions are smaller, they have a bigger investable universe. It doesn’t matter if [relatively few] shares trade every day,” he says.

“It makes sense to play in the much more illiquid stocks where you’re protected from the professional, who cannot get in and out as easily. That means trading even further down the capitalisation-size ladder. Be aware that this part of the market is underresearched, and you’ll have to do it.”

Alistair Lea, small-cap portfolio manager at Coronation Fund Managers, says a fund manager could invest in about 40 stocks.

While that means the portfolio carries less risk, it also has less potential upside or downside. “If you go it alone you’d buy maybe three or four, which is a risk-reward balance. If you invest in quality you could do better than the fund manager,” says Lea. —