Direct versus Indirect Investing

Which of the above is you? Are you the type of person who loves to fix your own car, learn how engines work, and understand exactly what keeps you moving on the road? Or, are you the type of person who would rather conveniently and comfortably pay a mechanic to fix your car for you? There is no right or wrong way to get your car fixed, there is just a particular style that suits different personalities and lifestyles.

Guess what? Investing in the share market is no different. Luckily, there are share market investment products out there to suit all personality and lifestyle types. Let’s discuss what they are:

Managed investments – a managed investment is analogous to a mechanic fixing your car. You pass your asset over to a professional who uses their skill to achieve a desired outcome. In the context of investing in the share market, this involves investing your money in a managed investment product and paying a fee to a professional who will invest your money on your behalf.

Investment products of this type include Exchange Traded Funds (ETFs), managed funds, and listed investment companies. All of these products can be purchased through your broker.

Direct investments – a direct investment is just like fixing your car yourself. You rely on your own knowledge, experience, and ability to learn to make independent investment decisions and directly buy shares in individual companies to make up your own portfolio.

Benefit of each style

Feature Managed Investments Direct Investments
Time Requirement Low High. Time is required to adequately understand the share market and the companies being invested in.
Minimum Investment Can be low High to cover brokerage
Management Fees Vary depending on product. Can be high for actively managed portfolios. None
Flexibility Limited. Normally, investors can only choose the asset class and fund strategy and not the individual assets. High. Investors choose and build the portfolio that they want.
Diversification High. Managed funds are usually highly diversified, sometimes more so than what an individual can achieve. Can either be highly diversified or not depending on the individual’s strategy and capital available to invest in different securities.
Ease of Investing Overseas High. Managed investments specialising in overseas shares undertake research, make transactions and simplify tax for unit holders. Low. International markets are often very different to the Australian market, making research much harder.

Brokerage for direct investment in overseas shares is high.

Tax implications for international assets can be complex.

 

Mixing direct and indirect investments.

From the table above, it is clear that direct and indirect investments each have their strengths and weaknesses. Therefore, it may be the best option to hold both direct investments and indirect investments. A particular investor may like to research and manage direct investments in Australian shares but feels like their knowledge of overseas markets is insufficient and therefore, prefers to rely on the expertise of a professional, via a managed fund, for their overseas investments.

Conclusion

There is no right or wrong way to invest in the share market. Remember, your ability to invest in the first place is more important than investing in the most ideal, cost effective, and highest yielding way. Therefore, choose an investment approach that best suits your personality and lifestyle and enjoy the financial freedom that will come your way.

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