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Why I Don’t Invest In Individual Stocks Anymore – Here’s a Better Way to Invest

By in Asset Allocation, Bond, Investing, Mutual Funds, Stocks | 16 comments

I Don’t Invest in Individual Stocks Because I’m Smart and a Lazy Investor

According to Warren Buffett, Chairman, Berkshire Hathaway:
 
“Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.”
1996- Shareholder Letter (sourced from IFA.com/quotes/)

Over the past several years, I’ve gradually moved my family portfolio and my corporate portfolio away from individual stocks and into index mutual and exchange traded funds (ETF’s). Although both portfolios have sported excellent long term returns, not every holding was a winner. In the case of two stocks, I did not fare well.

The Investing Story Began Decades Ago

First a bit of background, I have been investing for decades with excellent outcomes. For many years both the portfolios I managed handily outperformed the S&P Index. I was never a frequent trader or market timer, but stuck to a value investing approach. I spent hours researching the individual stocks, studying valuation, debt, profitability and other ratios. I read annual and quarterly reports and studied the industries.  I was disciplined and didn’t buy over-valued stocks but looked for bargains and solid companies stung by a short-term price drop. 

As anyone in the investing field understands, no matter how many winners you have in your portfolio, there are bound to be a few losers. Over the years, I tired of the hours of research required to invest in individual stocks. On top of that, finance research convincingly supports the out-performance of index fund investing over that of stock picking. In fact, in a typical year, a majority of actively managed mutual funds do not beat the returns of their index fund benchmarks. And those managed funds that outperform one year, rarely repeat that performance year after year. 

The takeaway is simple; it is quite difficult to beat the overall market consistently.

In spite of my resolve to transition to mutual and exchange traded funds (ETFs) during the past decade, I didn’t immediately sell all of our individual stocks.  I decided to get rid of them gradually, after analysis and determination that their growth prospects were fading. In the case of Nokia (NOK) and Best Buy (BBY), I waited too long to sell.

Best Buy and Nokia = Poor Performance

Here’s why I don’t invest in individual stocks anymore. 

Best Buy (BBY) was a remarkable growth story over the years with nationwide store expansion. Walk into Best Buy and you could find any computer, television, refrigerator, gadget or electronic you craved. With the closure of Circuit City in 2008, I thought Best Buy would go through the roof and pick up all of their growth. When when I purchased Best Buy, its future looked promising and its growth initiatives and store expansion foretold a rosy future for the company. 

Best Buy is volatile and always has been. It’s shelves are filled with commodity products. This makes it difficult to make a profit because these types of goods lack a competitive advantage. Although some investors read the tea leaves and bought Best Buy on dips and sold at peaks, I wasn’t one of them. This was one of the stock buys that didn’t go my way.

Nokia (NOK) a former technology darling seemed like a sure fire holding as well. With a market share topping 40% in 2008, how could the company falter? Here’s how, with the advent of the smart phone, Apple’s iPhone and the android, the cell phone landscape shifted. Other players, stole Nokia’s lead, and Nokia became just one player in the pack. In 2013, Nokia’s market share fell to 29%, with no rebound in sight. In fact, according to Statistica.com:

“In the third quarter of 2007, Nokia’s market share was 48.7%. By the third quarter of 2012 the company’s market share had slipped to just 3.5%.”

Since it’s peak $39.00 price in October 2007, Nokia’s stock price has steadily declined. Since 2012, the company’s stock price has traded in the the $2.00-$8.00 price rante. 

I bought Nokia in 2008 at $30 per share at what I thought was a bargain from it’s 2007 $40 high. Clearly, I was wrong. I sold the shares in the single digits after realizing the company wouldn’t be returning to its former glory.

This Yahoo!Finance chart shows why it is so difficult to invest in individual stocks.

Secret...Find out why I don't invest in individual stocks anymore.

At present, we still hold one individual stocks, Lowes (LOW). 

Excellent Index Fund Investment Decisions

In 2009, as the stock market declined from the financial crisis and mortgage meltdown, I made a smart and difficult investing decision. I invested sum of money at the trough in several index ETFs –  Vanguard Total Stock Market ETF (VTI) and Vanguard REIT index fund (VNQ) along with several others.

Although I don’t advocate ‘market timing’, there’s nothing wrong with deploying some cash into the markets during a systematic market trough. In general, I prefer the index fund lazy investing approach.  If you still want to try your hand at individual stock investing, here are some guidelines.

Takeaway: Why I Don’t Invest In Individual Stocks Anymore

  1. Research proves that index fund returns outperform professional fund managers returns most of the time.
  2. Individual stock picking is time-intensive.
  3. It used to be fun and a challenge to try to ‘beat the market’. Yet, with the advent of algorithmic trading, it’s more difficult than ever to outperform the markets.

All of this research and analysis is quite time consuming. Add the strong possibility that you will not beat a passive index fund even after all of the research, and you have the reason why I don’t invest in individual stocks anymore.

Investing Caution

Please understand that you can just as easily lose money investing in mutual funds or ETFs as in individual stocks. Stock and bond investments are volatile and the prices go up and down, whether you hold individual stocks, bonds, or funds. That said, if you have the stomach for a bit of volatility, investing in stocks and bonds offers the  potential for long term growth.

Just remember not to put any money into the stock market that you will need during the next 5 to 10 years. Keep those funds you need for the shorter term in TIPS, I Savings Bonds, and money market funds. If you happen to have a lot of debt, it’s a good idea to get rid of most of the debt before embarking on any type of investment program.

This advice is for information purposes only and should not be considered as a recommendation to buy or sell any securities. For financial advice, please see your personal investment advisor.
 

    16 Comments

  1. I am just the opposite of you Barb; I started investing in mutual funds decades ago and only started buying individual stocks a couple of years ago. While I enjoy buying stocks, it’s an expensive hobby. I have done much better picking good mnutual funds than stocks. Of course, I did pick a bad historical period to start dabbling in stocks.

    Bret @ Hope to Prosper

    April 21, 2012

  2. Barb, I have gone the exact same way. Very simple portfolio consisting of 5 broad market passive ETFs at Vangaurd with a solid asset allocation. I sleep very well at night knowing I will beat the vast majority of active fund managers year end and year out. Will I miss the upside of going “all in” on next Apple? Yes! But I also won’t get burned by being heavy in the next Enron!

    BusyExecutiveMoneyBlog

    April 21, 2012

  3. @Bret-The market forces spare no one. And picking the bottom of any market is impossible. Thanks for sharing your experiences.
    @Busy-Totally agree. I’m saving myself a lot of time and stress!!! And the returns are just fine 🙂

    Barb

    April 21, 2012

  4. I have mostly mutual funds, but just a few individual stocks. My individual stocks either yield dividends or high growth opportunities (biotech and/or high tech stocks). I like the diversification of mutual funds.

    krantcents

    April 21, 2012

  5. Solid advice Barb! Nice picks for Nokia and Best Buy, but it is amazing to see fortunes turn so quickly with the rise of smartphones. Not sure why Best Buy is still falling. Amazon and online shopping? I’m mostly a mutual fund guy who dabbles a little with stocks.

    Buck Inspire

    April 22, 2012

  6. Great post Barb. I couldn’t agree more. In my 14 years as a financial advisor I’ve found that many folks are good at buying stocks at the right time, far fewer have a good sell discipline. If you pick the right stocks consistently (Apple, etc.) and sell at the right times you will likley do better that a portfolio of mutual funds/ETFs. That said I’ve found that asset allocation using funds and ETFs is a great way to control risk and align one’s investments to their financial planning goals.

    Roger Wohlner

    April 22, 2012

  7. @Krantc and Buck- Seems like the pull of individual stock investing is compelling. It is quite nice when a company you selected outperforms you expectations and you buy and sell at the opportune times.
    @Roger-It’s always nice to have a Financial Advisor promote asset allocation and index funds as opposed to generating lots of commissions by buying and selling individual stocks.

    Barb

    April 22, 2012

  8. The stock market is quite risky. Do you still have plans of continuing in the future? I have some plans to do something like that. I hope I get lucky.

    -Luis

    Luis P.

    April 22, 2012

  9. I’ve held the idea of a mix of good asset allocation (index funds/ETFs) to most of my portfolio (80%) and no more than 20% for active stock picking. IMHO this gives you the best of both worlds. 100% stock picking is very hard if not impossible. Though a small portion of your net worth for trying to achieve alpha. If you fail, then the loss is small compared to the averages.

    I bought in 2009 specific stocks and did very well in the process compared to the S&P 500. Though right now I’m having a tough time finding bargains, so either the new money will go into ETFs or stay in cash. I see no reason to add new money if markets are overvalued.

    Investor Junkie

    April 22, 2012

  10. @Luis, I’m moving towards all funds and etfs.
    @Investor, I totally agree with your percentages. Small enough in individual stocks that the mistakes won’t kill you and you might up the alpha of the overall portfolio with a good pick or two. What I am tired of is the countless hours of research necessary. WRT to a cash position, I have no problem holding large cash positions when I believe the markets are overvalued.

    Barb

    April 23, 2012

  11. Hey Barb,

    We have gone in the same direction. I once had my portfolio in stocks and indexes (roughly 50-50). But doing the research for my book really convinced me what the best is. When it comes to rebalancing, choosing which stocks to buy or sell is extremely difficult. I’m glad I no longer have that problem. Rebalancing with indexes is sooooo much easier.

    Andrew Hallam

    April 27, 2012

  12. @Andrew, The fund route leaves so much extra time for other pursuits. Of course you forgot to mention the title of your book, The MIllionaire Teacher. I’m halfway through and looking forward to reviewing it in the coming month.

    Barbara Friedberg

    April 27, 2012

  13. Hi Barb

    I am trying to transition from individual stocks to mutual funds. What advice do you have on how to decide which stocks to sell first and how gradually I should transition to mutual funds.

    Thanks in advance.

    Jennifer

    June 9, 2012

  14. I totally agree with you. Low cost, index funds is the way to go, rather than investing in individual stocks.

    Buy & Hold Blog

    February 15, 2013

    • The time and effort required to invest in individual stocks, in return for the reward is questionable. Unless you love researching and studying companies, I suggest investing in index funds! thanks for chiming in.

      Barb

      February 15, 2013

  15. Dear Barb,
    I liked what you said about As anyone in the investing field understands, no matter how many winners one holds in a portfolio, there are bound to be a few losers
    Continue this kind of articles because they are very good and useful, congratulations.

    stocks Marketing

    June 25, 2013

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