How to avoid being a ‘naive’ investor

About a third of investors are missing out because they buy stocks in equal quantities, according to a study by the University of Warwick.

The academics looked at a sample of more than 50,000 accounts on the Barclays platform, all of which bought shares in more than one company on a day between April 2014 and June 2016.

Of these, a third invested using round numbers. For example, if they had £2,000, they invested £1,000 each in two stocks. Those that invested £3,000 divided it between three stocks at £1,000 each.

The researchers referred to this as the “naive buying formula”. Buying stocks in equal quantities gives the illusion of simplicity in what can be a complicated area, said Dr Peter Brooks, of Barclays Smart Investor.

Typically these investors buy “on rotation”, topping up the stocks that they have bought least recently.

However, this does not take into account price falls or information that may have emerged in the interim.

“Naive” buyers who invest without analysing the shifting prospects of individual stocks may be exposing themselves to more risk than they mean to. “A rational investor should be looking at the total risk they need to be taking,” Dr Brooks said.

As well as simplicity, cost is another reason why many investors choose this approach.

Transaction costs charged by brokers mean that anyone investing small amounts regularly can rack up substantial fees by splitting their investments across a wide range of companies each month.

Dr Brooks said that anyone investing regularly would be better off putting their money in a UKfocused fund rather than buying individual stocks, as this would provide diversification while keeping fees lower.