If you make New Years resolutions, 2024 may be the year you or a young person in your life begin investing.
Your first instinct may be to buy shares in a few well-known companies — firms whose stock prices youre confident are bound to rise. There are lots of stories on the internet about how well you could have done if you bought the right stock at the right time.
But youd likely be making a mistake, says Christine Benz, director of personal finance and retirement planning at Morningstar. A user on X, the site formerly known an Twitter, recently resurfaced a post of hers from 2020 which reads, in part: “Individual stocks are TERRIBLE investments for people just starting out. “.
Rather than starting their investing journey with a handful of individual stocks, young people should focus on building a diversified portfolio using low-cost mutual funds and exchange-traded funds, Benz says. Heres why.
The Single Stock Dilemma: Smart Investment or Unnecessary Risk?
Have you ever been at your phone and had your thumb on the “buy” button for that one hot stock that everyone is talking about? It could be Apple, Tesla, or a new tech company that your friend says is “going to the moon.” ” I know I’ve been there!.
The question that keeps many would-be investors up at night is simple is it worth buying a single stock?
The answer, like most things in investing, isn’t straightforward It depends on your financial goals, risk tolerance, and how much time you’re willing to dedicate to monitoring your investments.
This article will tell you everything you need to know about investing in stocks directly vs. investing in mutual funds and exchange-traded funds (ETFs). We’ll talk about the pros and cons and modern portfolio theory to help you make an investment decision that’s right for YOU.
Understanding Single Stocks vs. Diversified Investments
Before diving into whether single stocks are worth your hard-earned money, let’s clarify what we’re talking about:
- Single stocks: Ownership shares in one specific company
- Mutual funds: Professionally managed investment pools that own many stocks
- Exchange-Traded Funds (ETFs): Similar to mutual funds but trade like stocks throughout the day
When deciding between these options, modern portfolio theory comes into play. This investment approach focuses on maximizing your returns without taking on unnecessary risk. The theory suggests there’s a sweet spot where combining different investments minimizes risk while maximizing potential returns.
To do this, you buy assets that are not very closely related to each other. This spreads out your unsystematic risk, which is the risk that comes from one stock. Others will zag when one investment goes up or down, making the portfolio as a whole more stable.
The Upside: Benefits of Buying Individual Stocks
1. Lower Fees Over Time
One of the most compelling reasons to buy individual stocks is cost efficiency, When you purchase shares directly
- You pay a fee when buying and another when selling
- No annual management fees like those charged by fund companies
- The longer you hold the stock, the lower your ownership cost becomes
Since investment fees can seriously eat into your returns over time, this advantage shouldn’t be overlooked!
2. Complete Transparency and Control
With single stocks, you know exactly what you own. It is clear where your money is going and which businesses you are supporting.
You decide:
- Which companies to invest in
- When to buy shares
- When to sell shares
This level of control appeals to many investors who want to align their portfolios with their personal values or market insights.
3. More Efficient Tax Management
Managing taxes becomes simpler with individual stocks. YOU control when to sell, which means you decide when to realize gains or losses.
With mutual funds, the fund manager makes those decisions, and you’re assigned your portion of the gains regardless of when you bought in. This can lead to unwelcome tax surprises, especially if you purchase a fund late in the year just before distributions.
The Downside: Challenges of Individual Stock Investing
1. Diversification Difficulties
The biggest hurdle for single-stock investors is achieving proper diversification. Research suggests you need between 20 and 100 different stocks to be adequately diversified.
This creates several challenges:
- Requires significant capital to properly spread across many companies
- Difficult for beginning investors with limited funds
- Increases your portfolio’s unsystematic risk if you can’t afford many different stocks
Remember, proper diversification is about more than just quantity—you need stocks across different sectors, company sizes, and geographic regions.
2. Time Commitment
When you buy individual stocks, YOU become the portfolio manager. This means:
- Regularly monitoring company performance
- Keeping up with industry trends
- Following economic news that might impact your investments
- Researching financial statements and earnings reports
Be honest with yourself: do you have the time, knowledge and interest to do this properly? Many successful investors dedicate hours weekly to portfolio management.
3. Emotional Decision-Making
We humans are emotional creatures, and that can be dangerous for investing. With individual stocks:
- Market volatility becomes more personal
- Fear might push you to sell during downturns (locking in losses)
- Greed could tempt you to chase hot tips without proper research
- You might hold losing positions too long hoping for recovery
These emotional reactions can lead to impulsive trading, increasing fees and potentially damaging your returns.
Finding Middle Ground: Hybrid Approaches
You don’t have to choose between ONLY stocks or ONLY funds. Many successful investors use hybrid approaches:
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Core and Satellite: Keep 70-80% of your portfolio in diversified funds (the core) while experimenting with individual stocks using the remaining 20-30% (satellites).
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Build Gradually: Start with broad-market ETFs, then add individual stocks as your knowledge and capital grow.
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Sector Concentration: Use funds for broad market exposure but select individual stocks in sectors where you have specialized knowledge.
These approaches can give you some of the benefits of both worlds while mitigating the drawbacks.
Is Single Stock Investing Right for You? Ask Yourself These Questions
To determine if individual stocks make sense in your portfolio, consider these factors:
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Investment Knowledge: Do you understand financial statements, valuation metrics, and industry analysis?
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Available Capital: Can you afford to buy enough different stocks to achieve diversification?
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Time Availability: How many hours weekly can you dedicate to research and monitoring?
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Emotional Temperament: Are you disciplined enough to avoid panic selling or impulsive buying?
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Financial Goals: Are you investing for long-term growth, income generation, or short-term gains?
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Tax Situation: Would tax-loss harvesting and careful gain planning benefit your personal situation?
Be brutally honest with yourself when answering these questions!
Best Practices for Single Stock Investors
If you decide that individual stocks do have a place in your portfolio, follow these best practices:
Start Small
Don’t go all-in on individual stocks right away. Begin with a small portion of your investment capital while you learn the ropes.
Do Your Homework
Before buying any stock:
- Read the company’s annual report
- Understand their business model and competitive advantages
- Analyze their financial health
- Consider management quality and track record
Set Clear Rules
Establish guidelines for buying and selling before emotions come into play:
- Maximum percentage of portfolio in any single stock
- Price or performance triggers for selling
- Regular portfolio review schedule
Stay Diversified
Even within your stock portfolio, aim for diversification across:
- Different sectors (technology, healthcare, consumer goods, etc.)
- Company sizes (large, mid, and small cap)
- Geographic regions (domestic and international)
Keep Costs Low
Use a low-cost broker and trade infrequently to minimize expenses.
Real-World Example: The Single Stock Disaster
My cousin Jake learned about single stock risks the hard way. In 2021, he put 75% of his savings into a popular tech stock that everyone swore was “the next big thing.” The company looked promising with cool products and growing revenues.
When the tech sector crashed in 2022, the stock plummeted 80%. Jake panicked and sold near the bottom, locking in massive losses that wiped out years of savings.
The painful lesson? Even promising companies can face catastrophic declines, and having too much of your money in one place is dangerous.
The Verdict: Is It Worth It?
So after all this, is it worth buying a single stock?
The answer depends on your personal situation, but here’s my take:
Yes, it can be worth it IF:
- You’re willing to do proper research
- You maintain adequate diversification elsewhere
- You understand and accept the risks
- You have the emotional discipline to avoid reactive trading
- You have enough capital to build a properly diversified portfolio
No, it’s probably not worth it IF:
- You’re just starting out with limited funds
- You don’t have time for research
- You’re easily swayed by market hype or fear
- You want a “set it and forget it” approach
- You prioritize maximum diversification with minimal effort
Final Thoughts
The decision to buy individual stocks isn’t black and white. Many successful investors include both funds and individual securities in their portfolios, adjusting the balance as their knowledge, capital, and goals evolve.
Whatever you decide, remember that investing is a marathon, not a sprint. The most important factors for long-term success are consistency, discipline, and a clear understanding of your own risk tolerance and investment goals.
Have you had success with individual stocks? Or do you prefer the simplicity of funds? I’d love to hear about your experiences in the comments!
The risks are too great with individual stocks
Financial pros like Benz urge investors to build broadly diversified portfolios for a reason: While the overall historical trajectory of the stock market has trended upward, any individual stock has a chance to decline sharply in price and destroy your portfolios returns.
Buy sinking your investments into a few well-known names, youre putting yourself in major danger if one or more of your picks flops — a likely scenario for investing novices, says Benz.
“People are making decisions about what individual stocks to invest in based on companies theyre familiar with,” says Benz. “They often dont know how to do due diligence or research companies. So theyre often going to pick stocks without the information they need to make good decisions. “.
Benzs original statement from June 2020 rings even truer in hindsight. After the downturn caused by COVID-19, there was a bull market where investors were bidding up almost anything that looked like a stock of the future.
Look at where some of those companies are now. Peloton, which traded for about $50 a share when Benz tweeted in 2020, trades under $7 as of market close on Jan. 8. Zoom was on its way up and trading at about $243 a share. You could buy it for $68 as of market close on Jan. 8.
Benz says that if you’re just starting out, you should spread your bets over a large part of the market. This makes it less likely that a drop in one investment will ruin your returns.
“Using broad market index funds is the one type of investment that has a lot of evidence to back it up and will give you a good return,” she says.
An index mutual fund or ETF aims to replicate the performance of an underlying market benchmark. Purchasing an ETF that tracks the S&P 500, for instance, gives you exposure to some 500 stocks. And because these funds arent overseen by high-priced managers, they come with low or, in some cases, no annual fees.
This Is EXACTLY Why We Tell People NOT To Buy Individual Stocks!
FAQ
Is buying one stock worth it?
Buying just one stock can be worth it as a way for beginners to learn about the market, provided the purchase aligns with their investment goals and they are aware of the risks.
How to turn $1000 into $5000 in a month?
7 Strategies for Investing $1,000 and Making $5000Stock Market Trading. Cryptocurrency Investments. Starting an Online Business. Affiliate Marketing. Offering a Digital Service. Selling Stock Photos and Videos. Launching an Online Course. Evaluate Your Initial Investment.
What is the 7% rule in stocks?
The 7% rule for stocks is a risk management strategy that says you should sell a stock when it drops 7% below the price you paid for it. This is done to keep your capital safe and limit your losses. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.
What if I invest $1000 a month for 5 years?
If you would have invested ₹1,000 per month for 5 years at a conservative 10% p. a. return, you could have accumulated around ₹77,437 today. If you would have consistently invested ₹1,000 per month for 10 years, you could have accumulated a corpus of around ₹2,04,845 today (assumed returns of 10% p. a. ).
