Myth #5 Individual Stocks Are the Best Investment
Financial Myth’s Blog Series
Unfortunately, much of the information relating to money that permeates our thinking as individuals and as a society is based on myths. This misleading information has no factual basis and can actually prevent us from achieving our financial objectives. This week we’re dealing with the misconception that individual stocks are the best investment.
Follow along with us through the Financial Myths Blog Series. You may be surprised by what you discover about yourself and your financial plan!
Myth #5 – Individual Stocks Are the Best Investment
Financial planning is all about allocation, diversification, and risk management.
My goal as a financial planner is to provide the highest predictable results using those three strategies. This complex process is why people seek my expertise. One thing that still blows my mind is why anyone would want to invest in individual stocks.
When you purchase a few individual stocks (less than 1,000) it immediately negates the value of careful allocation, diversification, and risk management.
Consider the following questions that surround a business and their subsequent implications.
-
What is the board considering?
-
What is the CEO doing?
-
What is the competition doing?
-
What impact is the ever-changing social environment having?
-
Could an unpredictable natural disaster affect this company?
All these are real and present risks. Predictable market returns only come when you own the market. To marginalize this risk using diversification, you need to own a substantial part of the market – not just 100 stocks. Or worse yet…. only 10!
Owning an individual stock is gambling. There are too many unknowns and variables that we cannot control. Only through diversification and allocation can we mitigate that risk.
What are the benefits of individual stocks?
Well, a lower cost, but at what risk? Are you saving 50 to 80 basis points (.5% – .8%) of cost at risk of a company losing 20-80% of its value because you were not aware of critical facts? To me, this sounds penny wise and pound foolish.
Some people tell me their goal is to beat the big boys on Wall Street. The majority of people should not worry about crushing the big boys! They should worry about meeting their goals, controlling risk, and putting the probability of success in their portfolio.
So, what’s my advice for financial success?
Be diversified, own thousands of stocks, and allocate between different asset classes. Don’t put your financial future on the line with a few individual stocks. You may win big, but can you afford to lose big? Let’s be prudent today!
Click to watch the related video!
Purchase Wayne’s Book: The Truth Project
Contact Us – FREE Second Opinion
Investment advisory services offered through von Borstel & Associates, Inc., an SEC Registered Investment Advisor.
