By Lt. Col. Shane Ostrom, USAF (Ret), CFP
answers to anything financial are rare. But this time, I’m going out on
a limb to say, no; no individual stock portfolios. Few exceptions
Financial success in general involves risks. All forms of
risks must be recognized and properly managed for success. If you can’t
identify and manage the risks with individual stocks, there’s a great
reason to not own an individual stock portfolio. It’s what you don’t
know that kills you.
Individual stocks don’t work as short-term investments because stocks
are unpredictable in the short-term. Individual stocks are best for
long-term portfolios. Yet, before building a stock portfolio consider
whether there are less risky ways to accomplish the same objective.
There are, so why add the extra risk of
If you “average down” in your account, this strategy flourishes in
market risk; the risk associated with overall market fluctuations.
Averaging down could help minimize risk in a volatile stock
portfolio—assuming you hold the stocks long enough. But if you
are not a regular contributor, your success rests squarely on the
shoulders of your stock choices and their diversification. How confident
are you in your individual stock selections?
Diversification can decrease your risks. Example, a single mutual
fund offers diversification by owning many stocks. Several mutual funds
in various market sectors (national, international, emerging markets,
bonds, etc.) provide greater diversification
by not being tied to a single market. However…
A single stock assumes all risks and one oversight puts your money in
peril. You have to deal with strategic risks like market, economic and
political situations, both national and world-wide. You also face
tactical risks like the business’ financial status, product
risks, death of a company leader, union strikes, a fire, an
unfavorable comment in social media, etc. How many different company
stocks would you have to own to diversify out the unacceptable risks?
Usually, too many for most to afford.
Consider the misses of mutual fund managers. They live and breathe
stock research, have special access to information and have a staff of
specialists to help. What is the quality of your research?
Finally, humans are not hardwired to be good investors. Our
psychology and behaviors sabotage our results. Owning individual stocks
magnifies our worse traits. A plan or professional help can decrease the
bad psychology and behaviors from your portfolio.
Financial success is like building a house. Requires a livable plan. A
solid foundation. Quality materials. Structurally sound bones. You don’t
add a cupola (individual stocks) until the fundamentals are solid.
Individual stock portfolios are best left to people
who have their financial house established.