Financial Tip Friday: Don’t Buy Individual Stocks

Financial Tip Friday: Don’t Buy Individual Stocks

There are some friends of mine who will see this title and think that I am crazy. The reason for this is because they have had great success with individual stocks and believe anyone can do it. Many people can do well with individual stocks. They have built an incredible portfolio. Jason over at Dividend Mantra is certainly one person who has done it. However, I have never had really good luck with buying individual stocks. Not sure why but I really never got into it. I have a financial experiment with an individual stock that is turning out pretty badly. Lost most of my investment. Thankfully it is less than .5% of my portfolio. It still stings though. I am supposed to be a bit smarter than this. And I hate wasting money. I know that it really isn’t a waste because you have to take some risk, but I hate to lose.

That said, I am not opposed to investing or even opposed to investing in stocks. If you have the time and can do the research then go for it. However, my stock investing is through mutual funds. I mean I own shares of Google, Apple, General Motors, Berkshire Hathaway, etc. I just choose to do it through a different venue. Here are some of my reasons:

  1. Instant diversification. By buying a mutual fund I am buying a basket of stocks or buying an entire index (e.g. the S&P 500). If one stock goes down it doesn’t mean that the rest will go down with it. I don’t have to worry about managing this one and that one. I like the diversification.
  2. Cuts Down on Research. I love doing research. However, if I am going to have an investing portfolio made up of individual stocks I probably should have dozens, if not hundreds of stocks, in all kinds of different categories. I don’t have the time nor do I want to put in the time to investigate each stock. That is why I buy a mutual fund. These guys are paid to do the research and I assume they have. They know more about the companies than I do. Even though I love research I want to put my time and efforts into someplace else.
  3. I Worry Less. Truth is if I have lots of individual stocks I am going to check it probably a lot. And if it goes down in price and precipitously goes down then I feel like I need to do something. For whatever reason with mutual funds I am not so quick to pull the trigger. Last week, for example, I lost the value of almost $15,000 in my portfolio. Yes that sucks. I hate it, but I didn’t lose much sleep over it. Partly because I knew it was going to come back. And another part was I realize this is part of the gig with investing. The market goes up and down in the short-term. But in the long-term (e.g. 10-20 years) I believe I will have more money in the future than I do today. Call me crazy, but I do believe that.
  4. I Like Simplicity. Investing is not that hard to do. I mean you have to sit down and do some research, but it really isn’t that bad. However, if I am investing in individual stocks I will be investing in a bunch of them. There will be stuff all over the place. I hate that. I hate clutter. I like things clean, neat, and tidy. I don’t always do a good job of it, but I try to pick up after myself and not have a lot of clutter in my life. I have too many other things going on. Investing in a handful of mutual funds that are part of the whole market provides that simplicity. It reduces clutter. I don’t have all my eggs in one basket, but I would hate to have all kinds of eggs. I would feel compelled (not sure why) to eat them. To do something with them. Simplicity gives me piece of mind.
  5. It Saves Me Money. If I were to engage in stock investing I would be buying shares every other week or so through my retirement plans. Now I don’t think I would incur any specific transaction charges through my plan from investing, but I certainly would if I was doing it through my Roth IRA. Every time I want to buy something I incur a small charge. I would hate paying that charge. I would rather do it at once or through my retirement plan.
  6. Those Aren’t My Choices. In my retirement plans I am not given the option to buy individual stocks. I might be able too in my 403(b). However, in my 401(a) I have specific choices to make and they are fairly limited. In truth, I like that. I go with the funds that have the best performance over the the life of the fund. I choose funds that have been around for a couple of decades and I don’t have to worry about picking this and that and this and that. Having mutual funds cuts down on the choices I have to make.

I don’t invest in individual stocks primarily for these reasons. If you do more power to you. I am not a trader. I am a person that wants to hold an investment for a long-time. If I were to invest in individual stocks I would invest in blue-chip companies that have been around. Companies like Procter and Gamble, AT&T, Disney, Google, Facebook, and others. Companies that I think will be around for a while.

And if you haven’t done it already it is time you started to invest. No more excuses like you can’t afford it or whatever. I bet you can afford to get fast food or a Starbucks? If you can afford that then you can afford to put some bucks away per month toward your future.

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