I hold about 30% of my public equity portfolio in individual stocks, but I wouldn’t advise most people to allocate more than 10% of their investments this way unless they’re truly passionate about it. The main reason is the challenge of consistently outperforming market indices over the long haul. While owning individual stocks doesn’t come with fees like index funds do, the real costs—your time and attention—are significantly higher.
For example, when Bed, Bath, and Beyond’s stock suddenly surged, I was thrilled as a shareholder. However, a closer look at my investments reminded me of the intensive oversight these stocks require. Back in 2014, after being inspired by a clerk’s turnaround story at Bed, Bath, and Beyond, I purchased shares worth $11,000. At that time, it was a small fraction of my portfolio, housed in a rollover IRA with favorable tax conditions for trading.
Owning individual stocks demands constant vigilance. Forgetting about my Bed, Bath, and Beyond shares until they made headlines again with a dramatic increase in value highlights the risks and required attention. Even with the stock’s sudden jump, it had still dropped about 60% from my initial purchase, showing a significant underperformance partly due to challenges like increasing competition from giants like Amazon.
Investing in individual stocks can be tricky for several reasons:
1. The lifecycle of companies can be unpredictable, with once-thriving businesses like Pan American Airways or Lehman Brothers disappearing.
2. As profits attract competition, industry profits can dwindle to zero, leading to the downfall of companies.
3. The volatility of individual stocks can evoke strong emotional reactions, which can cloud judgment.
4. Without proper portfolio management, small stock positions might not impact your financial goals, or conversely, large positions can lead to undue stress and underperformance if the companies falter.
Interestingly, many investors don’t realize that index funds and ETFs are actively managed to some extent. For example, the S&P 500 index committee at Standard & Poor’s regularly updates its company roster to reflect market changes.
If investing isn’t your passion, sticking to index funds might be a wiser choice. Enthusiastic investors might opt for up to 30% in individual stocks, but more than that could expose you to excessive risk and potential long-term underperformance.
Remember, investing should enable more freedom in your life. Nowadays, I prefer to spend less time managing my investments to focus more on family and personal interests. Simpler investing strategies allow this freedom.
Despite a recent spike in Bed, Bath, and Beyond’s stock price, the minimal impact on my overall portfolio reminded me of the importance of not letting such investments dominate my time or financial strategy. Consequently, I’ve decided to sell off part of my holdings and retain a small amount for potential gains, treating it more as a novelty than a serious investment strategy.
Overall, while individual stock investing can offer significant rewards, it requires a commitment that may not suit everyone. For those less inclined to immerse themselves in market trends and corporate performance, focusing on broader, more stable investment vehicles like index funds or managed ETFs might prove more beneficial and less stressful in the long run.
