Friday, 15 July 2011

Investing is a picnic: the difference between shares and investment funds.

I like visualisations and analogies. You've probably gathered that from my other posts. So here is another one.

Imagine you are going on a gourmet picnic with your friends. You have agreed to limit your food budget to £5 each.

Come lunchtime, you have two options:

1) everyone brings and eats their own thing.

2) everyone sticks their £5 in the kitty. Someone who claims to be a culinary genius goes and shops for picnic food, shares out the goodies and plates it up. You get one plate.


Option 1 is similar to investing in individual shares.

  • You choose the items - you get to enjoy all the nutrious and delicious goodness if your item is particularly tasty.
  • You may have picked up a mouldy pork pie. In that case, you get to nibble on the un-mouldy bits, or, at worst, miss out.
  • The number of items you can buy with your £5 is limited - you have to buy the whole box of your favourite Super Nutty Choco-Crunch chocolate biscuits, even though you may only be able to eat three before nausea sets in.

Option 2 is more like investing in investment funds.


  • Convenience: you don't have to spend hours at the market.
  • Your culinary genius may produce a whizz bang gourmet delight.
  • You get a wide exposure to lots of different foods, some which you wouldn't have thought of for yourself.
  • It doesn't matter if your piece of pork pie is mouldy - there is plenty of other stuff on your plate.

  • Your culinary genius may turn out to be more greasy caff than posh nosh.
  • If you like a particular item on your plate, you can't get seconds - you get what you're given on your plate.
I know that this is not an exact analogy but I think it's a decent start.

Bon appetit!