Why I Don’t Invest In Individual Stocks

individual-stock-investing

In the late 90’s, I engaged in the irrational exuberance that was the technology stock market bubble and went to the cleaners for it. I invested heavily in companies I’ve never heard of in business models that didn’t make sense because everyone was making a killing on the market.

Since then, I’ve taken a more “rational” approach to investing. In the mid-2000’s, I was back in the stock market investing in solid companies, with clean balance sheets, and room for growth. I did reasonably well, but I spent a lot of time to research and study each company. Though I did well, I didn’t beat the market consistently over time.

And that’s why I don’t invest in individual stocks anymore. No matter what people will tell you, and no matter how many success stories you hear about a friend who invested in Starbucks before it got big, no average investor can sustain that track record over time. Ask them about their losses, and you will get a clearer picture of how they’re doing.

If you are a serious investor in stocks, you spend time on research, you feel emotionally invested in companies, and depending on your broker, you pay transaction fees constantly. In the grand scheme of things, I don’t know anyone who has made a killing on individual stocks. I know this because all of my friends are still working.

It is also extremely rare that you will find someone who has beaten the market through investing in individual stocks, when compared to the number of people who actually invest in stocks.

This is why I invest in mutual funds and exchange traded funds.  They are managed by professionals whose sole job AND objective is increasing shareholder wealth.  You can mitigate risk by investing in mutual funds/ETFs, and you have the ability to invest in a specific sector.

You have several options in terms of value versus growth, small cap versus large cap, etc. Like Ron Pompeil said, you can set it and forget it (to a certain degree). I’d much rather take the time I spent researching stocks and putting that towards spending time with my family, or investing that time on my job to exceed expectations. Much like I hire an electrician, I’d much rather hire a mutual fund manager to manage my money.

Do any of you have success with buying and selling individual stocks?

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


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23 Comments

  1. White Coat Investor

    I’m with you. My time is far better spent at my day job than trying to eke out a couple extra points of return in stocks. More concerning is the fact that the data shows that the vast majority of investors can’t pick stocks better than an index fund. So not only would it take up my time, but it would likely NOT end up increasing my return. That sucks.

    Reply
  2. Financial Samurai

    I only have a small portion of my NW in my online trading account which I punt around for sh*ts and giggles for this reason.

    Getting asset allocation right is far more important!

    S

    Reply
    1. iam1percent

      Yes, I see nothing wrong with having a little play money to mess around in the market for fun, but as a long-term investment strategy just doesn’t jive with me.

      Reply
  3. krantcents

    Over the years, I have had some great hits and some terrible misses in individual stocks. I now invest only in mutual funds/ETFs.

    Reply
  4. Edward Antrobus

    I’ve only ever owned one individual stock and that was because I worked for the company. Not only does researching stocks take more time, but they are also more expensive to buy in e*trade.

    Reply
  5. My Own Advisor

    I see your points, but I like direct stock ownership. I use the big mutual funds and big ETFs to help me with my stock selections. I like the dividend income, and cash flow from these companies. I try and buy and never sell. If the markets tank, I just buy more. I’ve seen my dividend income steadily rise for years now. Hopefully by the end of 2012, I will be making over $6,000 in dividend income.

    I’ll never be rich, but that’s not why I invest in individual stocks.

    Reply
    1. iam1percent

      If dividend income is your goal, you can get similar dividend income from a mutual fund or dividend paying ETF while mitigating the risk of owning individual stocks.

      Reply
    2. Elle

      I too invest largely for dividend income, and overwhelmingly in individual stock positions. By plan, I am diversified with about 50 positions. I am aware some say this is more than I need. Still.

      I have had a few stunning losers but many other stunning gainers. They were stunning gainers either because of rises in stock price; rises in the dividend paid; being bought out and so paying a handsome premium over the original price I paid; spinning off other companies.

      Like “iam1percent” says, I know of funds with a goal of dividend growth. Some I watched for awhile. I do not rule them out. Some day I may go to strictly funds. But at present, and for about the last 11 years of considering them, I do not like the lack of control I have with them.

      Since about January, I have been taking gains on many of my stock positions, selling half the position and buying a different stock or perhaps doubling down on a stock that has fallen, all to re-balance.

      I am retired. I have the time. I use Ben Graham’s general counsel for individual investors for picking stocks. Graham is the father of “value stock” investing. Given the obvious, return-chasing blunders so many fund managers make and how some financial advisors push funds with a 3-5% load (terrible choice, folks), I continue to find Graham’s counsel helpful.

      I have been buying individual stocks (and some funds) in earnest since about 2001. I have held stock positions since the mid-1980s, well before retirement. It does take experience, reading some of the classics, and going through, say, Black Monday, 1987 and the current recession to feel comfortable investing for the long run in stocks.

      Reply
  6. Steven Crisp

    I agree with your premise, but ask why you don’t take it to the logical conclusion.

    From investment books I’ve read, it seems clear that mutual fund managers can’t consistently beat the market either (when you take into account expenses and taxes).

    So why not go strictly with index funds? Purchased from the right firms (I like Vanguard), you can find these funds with less that 0.1% expense ratios (for some of their Admiral funds, $10000 minimum), and even their basic index funds do a keeping expenses low.

    This is where I’ve gone with my taxable investments. My retirement accounts are with Fidelity as my company doesn’t offer Vanguard as an option, but I still use only indx funds.

    Now I really just need to set it, and forget it, except to rebalance the portfolio occasionally. I get my time back, and have removed all “investment anxiety”. The money has to be somewhere, and the market has proven itself over the long-term as the place for the best average return.

    Just wondering if you had considered index funds and decided against them for some reason?

    Reply
    1. iam1percent

      I think the jury is still out, but yes, for the most part, it is hard for mutual fund managers to beat the market over a long period of time. I wrote about the bet between Warren Buffett and Hedge Fund managers (http://www.iam1percent.com/mutual-funds-versus-hedge-funds/) which discusses this very debate. I don’t think I’ve stated that I’m against index funds…index funds are a very logical and reasonable investment.

      Reply
      1. Index investod

        Actually the jury finished reading their verdict years ago. It is exceedingly rare for even the pros to beat the index for very long plus adding in fees and other expenses and you’re paying someone money to underperform.

        Reply
        1. iam1percent

          Is 50% exceedingly rare? See the data here (http://www.insidermonkey.com/blog/wp-content/uploads/2012/04/Hedge-Fund-Fees.gif). You will notice that hedge funds beat the market 6 out of the last 13 years AFTER fees. Before fees, they beat the market 12 out of the last 13 years.

          So the jury you’re referring to is likely still in deliberation.

          Reply
          1. Index investor

            1. Hedge funds are only available to high net worth clients. So that by definition makes them rare.

            2. That data looks optimistic since Goldman Sachs says hedge funds performed worse in 2011 than your picture does (http://www.zerohedge.com/news/not-again-following-abysmal-2011-only-10-hedge-funds-are-outperforming-sp-2012).

          2. Elle

            A 50-50 probability of “beating the market” does not inspire my confidence.

  7. PK

    Had some success? Yes – but not enough to quit my day job. I’m also not convinced it’s skill – so I have roughly 20% of my net worth in individual stock. Still, it’s a cheap thrill at worst, and a great ego booster at best, so I’ll continue investing this way for a while…

    Reply
  8. Joe Morgan

    I too have dabbled a bit in individual stocks, but I realized I just don’t have the time to do the job properly. ETF’s and mutual funds work well enough for me. 🙂

    Reply
  9. 20's Finances

    I recognize that I don’t have enough knowledge to invest in individual stocks. Although I may start to push a small percentage of my portfolio into individual stocks.

    Reply
  10. Elle

    “iam1percent” wrote: “In the mid-2000′s, I was back in the stock market investing in solid companies, with clean balance sheets, and room for growth. I did reasonably well, but I spent a lot of time to research and study each company. Though I did well, I didn’t beat the market consistently over time.”

    Consistently? If one is comparing each year’s return of one’s portfolio with say the S&P, then one year is much too short a time period.

    Still, I do agree most people should invest in only funds; research diversifying on the internet; and forego a financial advisor. Those financial advisors working on commission should especially be avoided.

    Reply
  11. Geoff

    I have invested in individual stocks years ago, but not any more. As you say it’s very hard for the average amateur to get the timing right, and I found that on some I gained, others I lost, so it wasn’t worthwhile the time and effort.

    Reply
  12. RichUncle EL

    Hello great comments by the way. I do invest in individual stocks and I have only had one small setback with sirius radio. Besides that I have done good with individual stocks eventhough it is only about 10% of my networth I am looking to grow that in the second half of 2012 and 2013. I like the possiblities of how my money should grow with great dividend paying companies, I am leaning towards dividend aristocrats that have paid consistently for over 10 years without any interrupted dividend payment.

    Reply
  13. Brandy

    I invest in dividend paying stocks. I started in February of last year and as of yesterday overall my stocks are up 7.39% (not including the dividends paid). I don’t really do any research but I pay $150/year to a company that does the research for me, so it doesn’t take a lot of time. I just take money from each paycheck, look at the recommendations and pick some stocks to buy.

    Reply
    1. iam1percent

      That’s really good returns. Though 1.5 years isn’t long, I’m curious to see this company’s track record over a longer period of time.

      Reply

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