I have always been interested in personal finance and money. I remember I wrote a really crappy essay in high school called “Money Rules the World.” I would actually read about the stock price of my dad’s company in our local newspaper. Before I started college one of the professions I investigated was becoming a stock broker (I don’t think they even exist anymore). I watched the Dow Jones climb during the 80s and 90s and wished I could join.
However, my sojourn into the work force after I graduated from college did not result in a position where I was with an employer who had a 401k plan. Hell, my brother actually had a chance to invest in individual stock with the part-time job he had in high school and college.
It wasn’t until I was pursuing a master’s degree that I decided it was time to invest. And the primary reason was that I saw what was going on in the stock market during the 1990s and I thought I needed to get in on the action. Of course, the time I decide to invest was when the United States was in the middle of a recession. I think it was early 2001 when this occurred.
I went down to my local bank and I spoke with a personal banker about investing a small amount of money, about $2000 at the time. The problem with that chat was a few things. First, don’t open an IRA with a bank because they will try to put you into products like a CD or whatever. A personal banker is NOT a financial adviser and I wouldn’t take their advice. Second, I had about $10,000 in credit card debt. I should’ve used that money to pay some of that debt. Third, I should’ve been more proactive in my own education. I didn’t really investigate what I should be investing in. So I took that $2000 and invested it in individual stocks. Specifically, I invested in the company Mossimo, which was an apparel company and in the company my sister worked for, which was a bank.
If you were to ask me my rationales for buying those two stocks I probably couldn’t tell you. I think I bought the first one because it was cheap and I thought it would go up. The second one I bought because I knew the company. My sister had worked for them for a few years and they were a good solid bank. But as I said this was the middle of a recession so the stocks were going down in value. And I kept track of the stock market like EVERY day.
That was a mistake. I should’ve never looked at it. I should’ve just left it alone. However, when I saw that I was losing money I eventually decided to sell the stock and cash out my IRA to pay off some of my credit card debt. That eventually would come back to haunt me on my tax return for the next year, but I felt like I needed some money to pay off that debt.
So my backstory is a long-winded way of answering the question. Should you invest in individual stocks? Generally, I think the answer is a BIG FAT NO!! I learned a few things regarding my only foray into buying individual stocks.
First, don’t try to time the market. I should’ve just left my money alone and see if the stocks would recover. I didn’t have a long-term view. If I would’ve stuck with it I would’ve eventually made money, but I didn’t have that kind of patience.
Second, know what you are investing in. In order to really invest in individual stocks you have to do your home work. And I mean pour over their statements, how much debt they have, etc. I didn’t take that time. And frankly I don’t have the time. I want to do other things with my time than pour over the financial statements of individual companies.
Third, don’t cash out retirement accounts. Unless you are truly desperate and I mean homeless desperate you should NEVER cash out your retirement accounts. I mean you have to have some dire circumstances like you will never have a job again, your kids are starving, etc. It just isn’t worth it with all of the taxes and penalties that go with it.
Finally, if you want to invest do it with mutual funds. I have become a HUGE fan of index investing. Investing in index funds is something that most everyone can do. When you invest in index funds you are basically buying a stock market index like the S&P 500. In other words, you are buying portions of the top 500 companies in America. You get instant diversification in your investment and you get some great companies that you have put your money in. If you don’t have an index fund available to you then still invest in mutual funds. A mutual fund is nothing more than a basket of company stocks with a certain profile. For example, one mutual fund might focus on stocks that have a small capitalization. In other words, they are not worth as much money as say a Wal-Mart. That mutual fund might be called a Small Cap fund. Or you might have one that focuses on companies that are worth quite a bit of money. Whatever it is mutual funds allow you to spread your risk across dozens, if not hundreds of stocks. It is just an easier way to invest and a safer way to invest.
The One Exception
There is, in my opinion, one exception for the average person. A lot of companies will give you the opportunity to buy stock in their company as part of their retirement plan or even as a bonus or something. I don’t think that is a bad thing at all. However, I would say never put more than 10% of your investments into company stock. It can be just too volatile. And too many companies have become bankrupt and employees have lost everything (think ENRON and WorldCOM to name just a couple). So there is nothing wrong with owning a small portion of your investment portfolio in stocks, but I think for the general audience, mutual funds are better.
If you have the ability to take the time to investigate individual stocks than more power to you. There are great companies that pay awesome dividends, but generally I think people shouldn’t buy individual stocks.
Hello Readers, What do you think? SHould you invest in individual stocks? Under what circumstances should you do so?