However, if you have a strong view on the fortunes of a particular firm, buying the stock can add an extra kick to your overall returns.
This week FE Trustnet spoke to Graham Spooner (pictured), who is an investment research analyst at The Share Centre, about what direct equity exposure he holds in his own portfolio and which stock he is backing for the long-term.
In 2006 Spooner bought shares in Porvair, which is listed on the FTSE Small Cap index, because he liked the look of the company’s prospects. However, he is the first to admit that he knew little of the business’s inner workings when he initially got in.
"I bought this in January 2006 purely because I had read an article about it," he said. "The reason it caught my eye was because it is based in East Anglia, which is where I come from, and to be honest there aren’t many listed companies you can name that come from the area."
"It is based in Kings Lynn and the company is quite niche as it is a specialist provider of filtration systems. They make these filters mainly for the aerospace industry, but they also provide for other sectors as well."
"However, at that time 'green' companies were really starting to come to the fray and Porvair really fitted the bill as those filters attempt to reduce carbon emissions. It looked like an interesting product, and as I am a bit green myself, I just decided to buy it," he added.
Spooner admits that his approach to buying shares in Porvair was quite speculative as he did not know a great deal about the company. Yet he says if you are willing to dig a little deeper into a stock and take on the risk, you can afford to go with your instincts.
"It should always be based on fundamentals or the potential fundamentals and whether the company has cash or if it is at the right price before you go for your gut feeling," he explained.
"However, in terms of Porvair’s competition, I had no clue when I bought it. I also had no idea whether or not its product was going to be superseded by another business, so in that respect I did go with my gut feeling."
"Unfortunately, however, for every gut feeling I have got right in the past there has probably been one that has gone wrong," he added.
Luckily for Spooner, this gut feeling was eventually a fruitful one. The analyst says that although he had to sit through a period of fairly poor performance, his investment has begun to pay off.
"For the first two or three years it did absolutely nothing. In fact I think it went down quite a lot. However, over the last two to three years it has heavily re-rated as Porvair has benefited from an increase in demand for more environmentally friendly and cleaner engines."
"Also, I keeping seeing statements from the management team that they are trading above expectations, which is always nice to hear," he added.
As Spooner mentions, the performance of Porvair has been particularly good recently. However, it has struggled in the past.
According to FE Analytics, between January 2006 and January 2009 it lost 50 per cent. However, that period obviously includes the financial crash.
Nevertheless, investors who bought Porvair three years ago would be feeling much better. Over that time the stock has returned 206.82 per cent, while the wider FTSE Small Cap index is up 51.82 per cent.
Performance of stock vs index over 3yrs
Source: FE Analytics
That means that even despite its share price performance during the first few years, Spooner is sitting on a return of more than 130 per cent since he bought Porvair.
After a period of such strong short-term performance, Spooner says investors would be right to question whether they have missed the boat.
However, although the company is now well-rated by the market, he says its focus on reducing carbon emissions and its niche position in its industry mean he will keep it in his portfolio for a long time yet.
"The shares are £2.50 and I bought them at £1.20, so that isn’t bad. You also get a little bit of yield, though not a great amount. It is a smaller company, with a market cap of £100m, and was much smaller when I first bought it."
"It is now on fairly high rating as a lot of the good news has already been factored into the price; however, it has continued to perform well."
"Obviously it is a long-term holding as it has been in my portfolio for seven years. But it will sit there as I prefer to take a long-term view, as my days of trading are long gone," Spooner added.
