By Lt. Col. Shane Ostrom, USAF (Ret), CFP
Specific 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 exist.
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 individual stocks?
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.