Is Investing in Individual Stocks Still Worth It?
At some point, every investor needs to decide how to structure their portfolio. One of the main questions new investors run into is whether they should build their portfolio out of individually picked stock or invest in some kind of pooled structure like an index fund.
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Single stocks used to be the name of the game in the investing world, but single stock investing is slowly falling to the wayside in favor of more complex stratified investment plans. This shift has left many people wondering if single stock investments are even still worth pursuing at all.
Today, we are going to cover the pros and cons of trading individual stock. We will talk about what kinds of returns you can expect, how much risk they carry, and whether or not investing in single-stock is a good idea for your investment portfolio.
First, though, we are going to cover the exact difference between single-stock investing and pooled investments.
Single Stock vs. Mutual Funds
There are a lot of different kinds of investment options in the market. Two of the most common investment options are single stock and mutual funds, which include things like index funds and exchange-traded funds.
1. Single Stocks
Single stocks are the classic investment option. Each stock represents a share of ownership in a company.
As the company grows in value, the value of individual shares grows in tandem. Individual stocks are relatively simple to understand and have a more-or-less clear value structure.
2. Mutual Funds
Mutual funds are collective funds in which multiple investors pool their resources together to buy several stocks in a wide range of companies and sectors. Whereas individual stock consists of an investment in a single company, mutual funds could involve investing in up to hundreds of companies at the same time.
Mutual funds are normally the go-to investment option as investing in mutual funds is an easy way to diversify your portfolio and minimize risk while maximizing returns. Modern portfolio theory (MPT) holds that the ideal portfolio should contain a diverse class of investments from independent sectors and mutual funds consist of multiple investments.
In fact, most experts recommend keeping up to 90% of your invested money allocated in mutual funds while the rest can be used for single stock purchases.
One of the main reasons why mutual funds are claimed as the preferable option is that reading individual stock is tough. Turning a profit on individual stock requires some speculation combined with a lot of luck.
Moreover, with single stock, all of your funds are essentially in the same place. Mutual funds are preferred because they streamline the investment process and are generally more secure than individual stock.
Single Stock Pros
Single stocks have fallen out of favor but they still have their selling points.
Usually, single stock purchases have lower fees. Mutual funds usually charge an account maintenance fee to the fund company while single stock purchases only have fees when you buy and sell. Holding on to individual stock does not cost you anything either whereas keeping a mutual fund will accrue annual account fees.
More Control Over Investments
While mutual funds tend to be very stable and secure investment options, some people dislike how they have relatively little investment flexibility with mutual funds. Some investors prefer to have more direct control over their investments so they favor individual stock.
If you have particularly smart knowledge of the market and are an experienced trader, you can have a very successful and diversified portfolio composed of single stock.
Easier to Figure Out Taxes
Keeping your investments in single stock makes it easier to figure out what you owe come tax time. Since you are in complete control of what gets sold and when it’s sold, it is much easier to keep track of your finances and calculate your tax burden. In a mutual fund, decisions are made by the fund and assign your portion of equity.
One final advantage of single stock is that they are more liquid than mutual funds. Single stock can be bought and sold much quicker than investments in a mutual fund so it’s a lot easier to get access to your money when you need it. That being said, mutual funds are still fairly liquid, though not as much as individual stocks.
Single Stock Cons
Harder to Diversify
It’s perfectly possible to have a diversified portfolio composed of single stock, it’s just much harder than investing in a mutual fund. Picking individual stock to diversify your portfolio is time-consuming and requires a lot of research.
Depending on the size of your investments, a properly diversified portfolio needs up to 100 stocks. That is a lot of work on your part if you handpick each one.
Individual stock purchases open you up to more risk. If a company that you are invested in via a mutual fund does poorly, that loss is theoretically insulated by the other investments in the fund. With single stock, there is the risk that your entire investment in a company could be lost if it goes belly up.
Large Time Requirement
Picking single stock can be a time-consuming process if you are doing the proper research. Of course, you could just blindly pick single stock to invest in but this would probably turn out worse than not investing at all.
Competently investing in single stock requires time spent learning how to read financial statements, interpret technical indicators, and predict trends in the market based on historical and recent data.
A lot of people are drawn to investing because of the thrill of beating the market. But for the more fair-minded, the stress of trading single stock can be overbearing. Single stock tends to be much more volatile so there is the constant worry one of your investments can fail.
As a single trader, you will be competing in the market against large institutional bodies and firms. These groups have the time and money to research investments to get the best deals. It is possible for the individual investors to out-game the big players, but it’s much more unlikely to happen than likely.
Single Stocks: Worth It or Not?
Our answer is a very conditional yes, provided you as an investor meet certain criteria.
1. You are an experienced trader.
If you already have experience working in the investment world you will be in a much better position to successfully invest in single stock. You need to know technical skills for the field including how to interpret statements, how to use technical indicators, and have a good sense for sussing out market conditions and trends.
2. You have time to research.
Picking the correct stock to invest in takes a lot of work. You not only need to find a list of contenders but you have to do research on individual companies to reach a decision. If you are going to have the majority of your portfolio in individual stock, then you better make sure you have enough time to give the task its due diligence and make smart investments.
3. You have good control of your emotions.
One of the beautiful things about mutual funds is that it takes most of the emotional engagement out of the picture. It is very easy to get too emotionally invested when trading single stock and the last thing you want is your emotions dictating your behavior instead of rational analysis.
Single stock traders need to keep a cool head and know how to separate their emotions from deliberation. It is not a job for the temperamental or those quick to action; it requires planning, consistency, and restraint.
4. You use a stock screener.
A stock screener is an application that lets you search specific stock based on designated statistical metrics. Stock screeners will not pick winning stock nor can they help you make an investment plan, but they can help you sort through stock-based on features you want. Again, stock screeners are no guarantee for success but they help you find what you are looking for.
5. It constitutes a minority of your portfolio.
We would not recommend you ever have more than 40% of your funds allocated in single stocks. Some experts advise keeping 90% of your funds in mutual funds.
If you are going to trade single stock, you should try to keep the majority of your portfolio in different investments. Again, it is perfectly possible to have a successful and diversified portfolio composed entirely out of individual stock but it carries more inherent risk.
Robo Advisors: An Alternate Approach
Part of the difficulty of investing in individual stock is the time requirement. Fortunately, robo advisors are a neat solution that can help you trade individual stock more efficiently and autonomously. Robo advisors can automate basic stock transactions based on predetermined user preferences and they perform just as good as the market average and higher in many cases.
Robo advisors are an option worth checking out if you want a convenient way to automate investing in single stock. Many popular robo advisors give account holders the option to invest in mutual funds as well.
Single stocks are falling out of favor but they still have a few things to like. We would recommend keeping the majority of your money invested in funds but leave some in single stocks so you can practice trading.
We also do not recommend having a majority of your funds invested in single stock either. When used smartly, single stock can be a good way to bolster a solid performing portfolio and give yourself a bit more flexibility with investment options.