Thinking that this will be the year you invest in individual stocks?
If so, you aren’t alone— that’s why Ameritrade, e-Trade, MyDiscountBroker, and dozens of other e-brokers are growing. Unfortunately, putting together a portfolio of individual stocks takes more time and effort than picking a few mutual funds. More important, your new portfolio will probably have a lot more price movement than most mutual funds.
That means you’ll need to be confident about your decisions.
Here is a list of seven “resolutions”— things a stock investor should promise to do.
- Learn the difference between noise and information. Many people think they are being informed investors by watching TV investment shows and other sources that purport to explain fast moving events. While there can be interesting news items about an individual stock or industry— something you should know— virtually all discussions of what “the market” did on any particular day are useless, the equivalent of statistical noise. It is a market of stocks.
- Learn where to gather important information. Here, the world has improved greatly. It wasn’t so many years ago that you would go, hat in hand, to your broker and ask for a Standard & Poors’ sheet describing a company. That was what was available. Today, we have an abundance of sources that will provide daily news items on stocks in our portfolio, analyst estimates of earnings and growth, insider trading information, SEC filings, etc. You can get this information directly from your e-broker— witness the information provided by Fidelity and Schwab— or you can also get it from non-broker sources like Microsoft MoneyCentral and Quicken.
- Limit the number of issues in your portfolio. While academic research will tell you that you can reduce the risk from individual stocks by having as few as 15 issues in your portfolio, very few people can be informed about 15 companies— even with the tools we have today. I suggest a portfolio of 5 to 10 stocks; with the number depending on how much time you have to stay abreast of company news. If you really feel it is important to have more than 5 or 10 stocks, have a portion of the portfolio be “auto-pilot” stocks such as the “Dogs of the Dow.”
- Nibble at your stocks, don’t wolf them down. While this may cause you some remorse if a stock skyrockets, there’s a good chance you’ll have an opportunity to buy more shares at a lower price at a later date. If you don’t have the stomach to buy more shares after a stock declines, you need to rethink the original position— or whether you really want to be a stock investor.
- Once you’ve picked the number of stocks in your portfolio, keep it that way. Just as many people have chaotic mutual fund portfolios with dozens of overlapping funds, many stock investors allow their portfolios to get ‘fat’ with issues they know little or nothing about, reasoning that ‘it’s just a small investment’ so they don’t have to be as careful. The best way to run a portfolio is to make each stock you hold do battle with a new contender, forcing the new contender to displace a stock you already own.
- Have the courage to measure your results. There are two important ways to do this. The one you know about is how much your portfolio has gone up or down in the preceding year. Don’t throw out your worst performers. Look carefully at what did well and what didn’t. Use a source like Morningstar to compare the performance of your portfolio with funds that seem to have a similar purpose. The second way to measure is more intimidating: compare the performance of what you sold with the performance of what you bought. If the sales regularly do better than the buys, you’re making poor decisions.
- Always remember that there is an easy, passive alternative. If, when you measure your results, you regularly find that you are doing worse than the managed or passive alternatives, swallow your pride and give the job to someone else… or to an index. As I have written many times, the stock market is one of the worlds’ great sources of humility renewal.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Anna Nekrashevich from Pexels.com
(c) Scott Burns, 2022