Over the past few weeks, I’ve noticed a substantial uptick in questions on the subject of selecting individual stocks.
To be clear, our perspective is, if you’re picking individual stocks, it’s a lot like gambling. Sure you can win big, but the subsequent emotional rollercoaster can be as volatile as the prices of the underlying stocks.
While investing in individual stocks can be rewarding for some investors, at Fox Financial, we don’t bet on companies, sectors, or fund managers. Here are a few reasons why we recommend the long-term approach of a diversified portfolio over flash-in-the-pan success of picking individual stocks.
Increased Risk
The most important reason that you don’t want all of your investment funds tied up in a few individual stocks is because the amount of risk is substantially increased. When your money is diversified over a wide variety of investments, if one of the companies or sectors that you’re invested in comes into trouble, you won’t be ruined.
The stock prices of individual companies can drop dramatically for a variety of reasons from poor management, to unfavorable market conditions, and even major PR disasters. While we’re confident that the market, as a whole, will continue to rise in the long-term, we’re also aware that downturns in the market are inevitable. And although we don’t know when they’ll happen, having a diverse mix of assets in bonds, cash, and real estate can help to lessen the blow of stock prices decreasing.
You’re Not an Investment Analyst (and that’s not a bad thing)
While I agree that the careful analysis of a company could lead to a worthwhile investment, that process is better left to trained mutual fund managers, investment brokers, and financial analysts; not casual investors.
But even their research has some flaws.
Let me explain.
Let’s say you’ve come to the realization that you just don’t have the free time required to thoroughly research whether or not to buy an individual stock, and instead hire an active management firm.
Every day, for upwards of 8-10 hours, those fund managers are making decisions to buy or sell a particular stock based on research, forecasts, and prior experience.
Pretty straightforward, right? Well, here’s the problem.
Every time one of them decides to sell a particular position after careful analysis, another one has decided to buy after equally careful analysis. So, how do you determine who is right? That’s the thing, you can’t!
To make matters worse, once you add transaction costs (which are usually higher for active management), you will usually fare worse than if you had just stuck with an index fund.
Not All Financial Advice is Created Equal
If you’ve ever sought out a relationship with a financial professional, you’ve probably come across at least a few advisors whose “claim to fame” is the ability to consistently outperform the market.
While these individuals may very well have the best intentions, past performance doesn’t always guarantee future results.
Think about it this way, if an advisor’s value is derived primarily by their investment performance, they would have to beat the market by at least the amount of their fee to justify hiring them.
Needless to say, that is extremely hard to do.
Even if, by chance, you find someone that has a track record of outperforming the market for the past twenty years, there is no guarantee that their next twenty years will follow suit.
All of that to say, unless you’re looking to gamble, trying to “beat the market” is the wrong path.
At Fox Financial, we believe that your investment strategy shouldn’t try to beat the market, but that your investments should work with the market to offer you the greatest stability possible.
Money is emotional, and that emotion has to be appropriately managed if you hope to achieve long-term financial success.
There’s no two ways about it, if your financial plan doesn’t involve diversification, you’re not truly planning for your future, you’re just gambling with your money and hoping for the best.
That’s no way to achieve long-term financial success!
If you’re ready to get off the economic and emotional rollercoaster of individual stock selecting, we’d love to help. Click here to schedule a meeting to see if Fox Financial is a good fit.
