(This article originally appeared in the May 2019 isssue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine, or log in to read current and past issues, here; learn more about joining MOAA here.)
Individual stocks pose too much risk for most people building wealth. They don’t work as short-term investments, but studies indicate most investors don’t have the patience to hold stocks for extended periods.This leads to trading, which leads to questionable stock selection, bad market timing, taxes, and increased trading costs. Research indicates individual stock investors’ returns lag market long-term returns.
Diversification can decrease your risks, but it would take more stocks than most can afford to diversify out the unacceptable risks. A single stock assumes all forms of risk, and one oversight can put money in peril. Just one social media comment or news event can ruin your plan.
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Consider the misses of mutual fund managers: They live and breathe stock research and have special access to information and a staff of specialists, yet most still don’t beat the free-flowing markets over time.
Humans aren’t hardwired to be good investors. Our psychology and behaviors sabotage our results. Owning individual stocks magnifies our worst traits.
Have a plan or professional help to reduce the chance of negative psychology and behaviors ruining your portfolio. Then build a solid base. Until your fundamentals are solid, individual stock portfolios are best left to people who have their financial house established.
Need more investing information? Check out these MOAA.org pieces, visit MOAA's Financial Planning page, or visit our News Listing page and search under the "Finance" tab:
