Six Reasons Why You Shouldn’t Pick Your Own Stocks

When I first started investing, it was an overwhelming experience. I didn’t know where to get started and figured that I could just start investing in individual stocks.

I didn’t have a real strategy behind why I was doing what I was doing. I just picked a company that looked like it would be a good investment, and bought into it.

It wasn’t until I started to do some actual research and read up on books that had to do with investing in the market that I realized that I was probably better off not picking individual stocks.

As a matter of fact, practically everyone is better off investing in an index fund or ETF instead of picking their own stocks.

In this article you will discover six reasons why you are better off not picking your own individual stocks.

1. You don’t have the expertise to pick stocks

Picking stocks can be a difficult challenge. It takes a considerable amount of time to understand the market and to learn how to read a company’s financial statements.

Not only do you have to analyze a company’s financial statements, you also have to have a good understanding of a company’s behavior and how it affects the bottom line.

In addition, there are many schools of thought on how to pick stocks. Choosing between these various methodologies can be difficult and overwhelming. Not only that, but some of these methodologies just flat out don’t work.

2. You don’t have time to pick your own stocks.

I know you lead a busy life. If you want to pick your own stocks it will only add to the daily tasks that you to do.

It takes a significant amount of time to manage your own investments. You always need to keep an eye on your individual stocks in the event that something unusual does happen.

You also have to keep track of earnings announcements and other press releases by the company to make sure they are staying on the right track.

Most people don’t have the time or simply don’t want to take this much time with their investments.

3. You want to get rich quick.

Investing in the stock market won’t make you a millionaire overnight. Sure, some people became millionaires during the internet boom of the late 90s, but these people are the exception to the rule.

There were also many people who lost a ton of money in the 90s following the same strategies. They just ended up on the wrong side of the coin.

4. You don’t have the patience

In order to invest in individual stocks, you need to be extremely patient.

You have to be careful with your investment because it is easy to panic if your stock starts to plummet out of nowhere.

Investing in the stock market takes years of patience and discipline. If you aren’t willing to put in that time and effort, don’t pick your own stocks.

5. You don’t enjoy picking stocks

This one seems fairly obvious but if you don’t enjoy picking stocks, don’t pick your own stocks.

However, a lot of people don’t know if they enjoy picking stocks until after they have bought their first stocks. They realize how much time and stress is involved but by the time they realize it, it is too late.

One thing I would recommend is to use a stock market simulator game for a few weeks or even a few month.

Practice picking stocks and tracking companies in your free time. If you actually enjoy finding stocks and tracking them, maybe you are fit to pick your own stocks.

If you don’t enjoy this process, then don’t even think about picking your own stocks.

6. You want to beat the market

Let’s just clarify one thing: you will not beat the market. Many people don’t beat the market.

Professional money managers rarely beat the market. If they can’t do it, what makes you think you can?

According to Brad Barber of UC Davis and Terrance Odean of UC Berkeley, only 1% of active traders beat the market. They concluded that the more frequently people trade, the worse they ended up doing.

Sure it’s fun to imagine being the next Warren Buffett or Peter Lynch, but chances are you won’t be one of those guys.

What should you do instead?

If you aren’t picking your own stocks, what should you do with your money?

My recommendation for those investors is to invest in a total market ETF. My personal favorite is the Vanguard Total Stock Market ETF (VTI).

By investing in this ETF you will have a diversified portfolio which also has extremely low fees compared to other mutual funds.

The Importance of Low Fees

Picking a fund with low fees is important to me and it should be important to you too.

Many actively manage funds have high fees. This means you will have to pay more money which will end up eating into your return on investment.

The kicker is this: most managed funds don’t beat the market.

Remember what I said above about beating the market? Most fund managers fail to beat the market consistently. Why pay more fees for something that’s not even going to give you a higher rate of return.

Why do you benefit from investing in a Total Stock Market Fund?

By investing in a total stock market fund, you experience a couple of benefits.

First, there is much less management on your part. All you have to do is put your money into this fund and sit back and let the stock market do the work.

You don’t have to spend a bunch of time analyzing individual stocks and tracking your portfolio.

Second, there is much less stress by investing in a total market fund. Because your investments are diversified, you don’t have to worry about a single company destroying your investment portfolio.

But what if I really want to pick my own stocks?

Now you know that you shouldn’t pick your own stocks. But what if you still have an itch to pick some individual stocks. What should you do?

One thing that you could do is invest a large percentage of your portfolio in the total stock market fund, and use the remainder to pick your own individual stocks.

This is a strategy that I personally use. I enjoy picking stocks but I don’t like the stress that comes with putting all of my eggs in only one or two baskets.

What I do is invest 60% of my portfolio in the total stock market fund (along with some bond funds) and I use the remainder to invest in individual stocks.

I still get the enjoyment of picking my own stocks, but I don’t have to deal with the risk of having all of my money investing in only a few companies.

Do you pick your own stocks or invest in a market fund? 

Quote of the Day

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, no more. Thus the investor who permits himself to be stampeded or undly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared mental anguish cause him by other persons’ mistake of judgment.

 

– Benjaman Graham in The Intelligent Investor

Booming Markets and Bonds

As the markets climbed to record highs today, I enjoyed pretty nice gains on my portfolio as we head into the holidays. Since I began investing in August I have enjoyed some pretty significant growth in a short period of time. Overall my portfolio is up about 7% as I continue to put a portion of my paycheck each month into the market. My biggest gains have been on Apple (AAPL) and 3D Systems (DDD), which have been up 19.09% and 18.67% respectively. In addition I have made 6.7% on my Ebay (EBAY) position in only 10 days and another 9% on Silicom (SILC) in only 6 days! Everything is going great!

But wait a second, didn’t mom always tell you if something sounds too good to be true than it probably is? As the stock markets soar higher and higher, there is speculation that we are due for a downturn eventually. Whether that is in a few days or months or a year from now, nobody knows. Sure experts and analysts can pretend to predict when the economy is going to boom or bust, but ultimately no one ever really knows how the market is going to behave.

Due to this uncertainty, I am going to diversify my portfolio more over the next few weeks in the event the market does eventually drop. Following Benjamin Grahams recommendations for investors, I will invest at least 25% of my portfolio in bonds. By investing in bonds I can help hedge some of the risk that comes with the stock market. If the markets drop, I won’t experience a big of losses as a result. If the markets continue to expand, I will miss out on some of those huge gains, but a least I can sleep a little easier at night knowing that not all of my investments rely on the stock market.

My plan is to research some Bond ETFs and figure out which ones I think are best for me. Many of the ETFs have dropped quite a bit in the past year, and I believe I can get some real bargains by investing now. I will chronicle my research on Bond ETFs and post about them here and hopefully I can help you diversify your portfolio as well!