Single Stock Investing

Before I knew the first thing about personal finance, I truly thought that all investing was essentially single stock investments. I had heard about this thing called mutual funds, but didn’t fully understand it, or really even care to. Because of my lack of knowledge on the topic, and my naivety of compound interest, I never put enough focus on investing in my younger adult years.

Luckily, I didn’t have this financial awakening at 65 when looking to retire. Index funds reign supreme in today’s age for a reason. I continue to utilize the VTSAX & Chill strategy today and recommend many to do the same. While everyone wants to talk to me about their Meta stock performance, or how Tesla is going to continue to crush it; I smile, nod, and continue with my strategy.

I could ask them things like, “Interesting strat, what are the cash holdings of that company?” Or “I heard that company just recently took on a lot of debt, any idea why?” Or “Man that company is in a rough market, what are they doing to differentiate themselves?” “Hang on, I only have 75 more questions about why you chose this company! Where are you going?!?” The truth is that most are buying single stocks out of a gut feeling, not research. So instead of single stock investing, should we start calling it gambling?

The goal of this post is to explain why most of us should leave single stock investing to someone else. Hell, I like to gamble as much as the next guy, but I’m not about to bank my retirement on it! 🤪 Let’s hit on a few points as to why single stock investing should be avoided.

Disclaimer: I am not a CFA, CPA, CFP, or a certified financial professional of any kind! Invest at your own risk.

The vast majority of individual stock pickers lose money. Quantified Strategies reports that only 13% of day traders maintain profitability over 6 months, and only 1% over the course of 5 years! 😬 I mean the point of picking stocks is to outpace the market, but the vast majority of us are losing our hats altogether! 🙈 Are you part of the 1%?

“Those are just day traders though, I got a guy.” Welp, unfortunately it looks as though the professionals have a hard time with this as well. Stockanalysis.com reports research showing 89% of fund managers fail to beat the market! I’m willing to bet “your guy” is charging some type of fee for their “professional” stock picking services, thus the goal would be to perform better than a standard total stock market fund. Almost 9 out of every 10 are failing to keep up with the market, let alone accounting for their fees on top of that. Reasons why so few fund managers are able to beat the market is a topic for another day.

Would you rather spend a ton of time interviewing investment professionals in an attempt to get one of the 11%? Or would it be easier to throw your investments into a low-cost index fund, and get on with your life?

If you think VTSAX is volatile, just wait till you have the majority of your investable assets betting on the future of one company! A giant swing for a total stock market fund might be around 20% up or down over the course of a year. A single stock can easily make swings of 5-10% per day!

Are you going to be an emotional robot when your life savings gets cut in half over the course of a given week? Wild swings like that happen to single stocks all the time. Chances are, if you see a downswing like that, you’ll feel the urge to get out of that stock before it falls even further. This brings us to our next topic…

Buy low and sell high, it’s just that easy right? If it was, we’d all be doing it. 🤪

You may have heard the old trope “Time in the market beats timing the market.” This statement has never been truer. Over the past few decades, the S&P 500 has averaged over 10% returns. Using the Rule of 72, we know that means the investment doubles roughly every 7 years.

By investing in single stocks, you are throwing all this out the window in an attempt to get that quick gain that beats the current market. Sure, you got that buddy that hit it big on Company X stock, but did you happen to ask him about how much they lost on Company Y and Company Z?

Essentially single stock investments require you to time the market, which is a losing proposition. Again, I ask you, are you part of the 1%?

The people who succeed at investing in single stocks are the ones who put in a ton of time and effort into researching the specific stock at hand and accurately predicting future outcomes. They must know all the ins and outs of this company, as well as the ins and outs of the industry as a whole. Company X, selling cordless phones, might have the perfect gameplan on how to hit the market strong and be poised for real growth in the coming years. That all means jack sh!t when Company Y comes out with the cell phone, rendering the cordless phone industry essentially null.

So, after all this extensive research you have done on Company X, it’s time to do even more research to see if it’s time to sell. Mind you, this is all for one of the single stock investments you have. Heaven forbid you have 20 single stock investments! 😱 Does spending most Saturday afternoons studying 10-ks, analyzing metrics, and keeping up with market trends sound like fun to you? Me neither.

You have heard the old saying “don’t put all your eggs in one basket.” As discussed above, most of us aren’t going to put in the time and energy that it takes to effectively research 20+ companies individually. Even if you did, do you have enough capital to invest in each individual company? If not, this may mean we are putting a heavy investment not only in one sector, but the performance of one individual organization!

The vast majority of financial professionals out there will tell you that diversification over long periods of time is the real key to wealth. Even a particular company that is looking strong right now will face unexpected challenges in the future. Meta (for example) might seem like it’s going to be around forever, and hell it might be, but is it going to continue to be a top performer 30 years from now? History would indicate, probably not.

Side note… does everyone remember MySpace? What a time to be alive! 😂

Let us not forget, the name of the game is to make money. Holding low-cost index funds over time have tax advantages as well as minimal costs while attaining compound interest from the growth of the market. Any single stock that is bought and sold within one year is going to be subject to short-term capital gains tax, which is going to really add up if you are constantly buying and selling different stocks throughout the year. There is a strategy called tax loss harvesting (a topic for another day) that can be utilized here if you really love more paperwork when filing taxes! 🤪

Not only will you be losing gains to taxes, but each purchase or sale of a stock is usually subject to high transaction costs. The trading commissions of the transaction are going to be based on the brokerage firm you are utilizing but can be upwards of $5-$10 per transaction! After all the dings you took from taxes and transaction costs, are you still keeping up with the market? If so, was that margin worth the time and energy you put into it?

In the world of personal finance, index funds are king. Since they offer a low barrier to entry, low cost to maintain, and general diversification, it’s easy to see why! Sure, day-trading can be fun, especially when you pick a winner. Purely due to the transaction costs and tax nightmares that can come out of it, I’d personally rather take that money to the casino and see what happens.

I’ll throw a few caveats to those who feel strongly about a particular stock and intend to hold it for the long haul. Keep it less than 5% of your total invested assets in the market (not including investment properties, angel investments, company holdings, etc.) Do your mounds and mounds of homework on the particular company/industry, be able to explain exactly why this company is going to succeed greater heights than its competition. “They are the only one in the industry,” is not an answer, others will come to take the throne. If growth from this investment grows to over 10% of your invested assets, you’ll likely want to sell off and invest the gains into a more diversified fund.

Pro tip (again not a certified pro here) – if you decide to invest in single stocks doing so in your Roth IRA will negate any tax ramifications from capital gains. If your Roth IRA is with one of the low-cost providers, it may alleviate some of transaction costs as well.

All that being said, I just simply don’t like single stock investing. Don’t get me started on speculations like crypto! 😂 The risk is high, the fees associated are high, and in general our time is probably better suited on other things. Not to mention, factors way outside the control of anyone involved could influence the performance of a company for no reason. Remember that whole Game Stop thing a while back? 🤪 Yea… not putting my retirement on the line like that!

Next week we’ll look at a particular situation to further explain how single stock investing can be a lose-lose situation. (No, it’s not Game Stop 😂)

Stay classy Solos! ✌️