Are companies riskier than managed funds and ETFs?
As we know, all investing has risk. And some investment choices have higher risk than other investment choices. Now we’re answering the question: are companies riskier than managed funds and exchange-traded funds (ETFs)?
The answer is a bit of yes, and a bit of no—it depends. If that’s a bit confusing, don’t worry! Once we dive a bit deeper, you’ll see how this all works.
A quick refresher
As a reminder, ETFs and managed funds give you a small piece of lots of different investments. For example, when you invest in an ETF like the Smartshares NZ Top 50 fund, your money is spread around each of the top 50 companies in NZ.
ETFs and managed funds tend to be diversified already, and they rebalance for you. They’ll buy and sell investments on a regular basis based on a set of rules, or based on the judgement of a manager. If a managed fund splits its total assets as 70% shares and 30% bonds, and the shares start to gain lots of value, the fund manager may sell some to get the balance back down to 70/30. This is just part of what you get when you invest in an ETF or a managed fund.
But that’s not the whole story.
Companies are not diversified. By definition, investing in one company gives you shares in...one company. This is why companies can appear more risky than ETFs and managed funds. But this doesn’t mean that companies are automatically higher risk!
Your diversification may not happen automatically, but that doesn’t mean it’s impossible. Rather, you just need to diversify and rebalance on your own rather than have a managed fund or an ETF do it for you. This is a bit more “work”, but you also get more choice, and more control over exactly what you invest in.
It doesn’t need to be that much work either! If you have $100 to invest, fee dependent—you can be as diverse or as not-diverse as you like (this is what Sharesies is aiming to make possible). You can invest $1 in each of 100 companies, $50 in each of two companies, or any other combination you want.
There’s a bit of a tradeoff here: on the one hand, diversification isn’t done for you when you invest in companies and it’s also not automatically adjusted on a regular basis the way ETFs and managed funds are. On the other hand, you control your own diversification and balancing. You can diversify as much or as little as you want, across any dimension you want.
Not all shares were created equal
The great thing about investing in companies is that there are lots of options. You can invest in established companies, brand-new companies, companies in industries you’re familiar with, companies that are getting lots of press coverage—you can do whatever you want.
For example, a brand-new tech startup with plans for world domination is probably going to be riskier than a decades-old business with substantial revenues in an established industry like electricity or telecommunications.
But this isn’t limited to companies. ETFs and managed funds have different levels of risk as well. An ETF that invests solely in fixed-interest products like bonds will be less risky than an ETF like the Smartshares Global Automation & Robotics Fund!
This highlights an important point: there are lots and lots of things you can invest in. There are lots of managed funds, lots of ETFs and lots of companies. Some things are very risky, and some things are not that risky—but there’s so much variety that you can pick and choose your level of risk, regardless of which of these three you’re investing in.
The final word
When you put all this together, you can see that investing in companies is just like any other investment—some investment choices are more risky, while other choices are less risky. Investing some, or all, of your portfolio in companies is a way to fine-tune your portfolio and more precisely calibrate it to the level of risk you’re comfortable with...and more importantly, allow you to choose what you invest in and support!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.