More proof that you shouldn’t buy individual stocks
- May 1, 2010
- 13 comments
- Posted in Investing, Latest Posts
I’ve written before about the risks in individual stocks. A company can look fine, but you never know what’s going on inside it. Nor can you predict outside events that could drag it down.
Latest cases in point: BP, now fighting a massive oil spill in the Gulf of Mexico, after one of its leased rigs exploded and sank. Transocean Ltd., which owned and operated the rig. And Goldman Sachs, that looked like a winner during last year’s market recovery but now has been charged with fraud by the Securities and Exchange Commission.
You can find new stories like this almost every day in the financial press. Maybe the stocks will do just fine when the crisis passes, but will you hold them for the duration? Will they do well enough to catch up with other investments you might have made? Ultimately, stock-picking is a loser’s game. Switch to low-cost, well-diversified mutual funds, especially index funds, for your equity holdings. Diversify among different types of stock funds and bond funds, and forget the false hope of building your future on the fortunes of particular companies. Luck and business change too fast for that strategy to be a success.
Tags: Goldman Sachs, individual stocks, oil spill
I disagree. i own 50 stocks that all pay dividends and the majority increase their dividend every year. With this many stocks i have my own personal mutual fund without the expenses. It’s not perfect. No system is. Last year many of my stocks cut their dividend or did not increase it. some I sold and the others i kept but make no additional or optional purchases. Most of my stocks are in DRIP plans and i hope this will cover some of my inflation costs when i retire soon
I agree to a point. The majority of our retirement portfolio is in diversified mutual funds but what I have done to diversify even more and to hedge a little against inflation is to invest in stocks of companies where we spend our money. Wal-Mart, Wells Fargo etc. And, dollar-cost average DRIPs. Of course the value, performance, and dividends determine if these are a place to invest.
“Build your own tax shelter by buying and holding growth stocks.” – Jane Bryant Quinn
This is a quote from you, dear Jane, in a Newsweek issue some years ago. I saved that article and took it to heart. Your advice allows an investor to save on expenses and fees.
ETFs are also a good choice, again to save on fees over many years.
Basically, as Harold says, we are creating our own personal mutual funds.
Ah, I was much younger then…. but I still like to see the context!
I recently retired from teaching and have a lot of cash in short term CD’s. I got out of the stock market at the start of the decline.
The short term CD’s will becoming due in the next couple of months. Both short and long term CD rates are low.
I have a substantial amount of $ in TIAA-CREF which is earning only 3% in what is called “TIAA traditional annuaity” (3% guaranteed) A portion of these funds were in the CREF growth and CREF stock funds open to those who have “Employer Retirement Plans”. I got out of those funds before the market decline and did not loose $. Lucky me.
Now that I am retired, I realize the important of finding investments with good yields so inflation won’t eat up my savings but it does not seem like a good time to take a lot of risks-hence I have all $ in low yielding CD’s and 3% guaranteed vehicles in TIAA-CREF.
At this point in time s it better to put $$ in short term CDs and wait for further economic improvement and rate improvement or ladder the 6-7 CDs that will soon come due?
Is it better to sit tight with my 3% guaranteed yield with TIAA-CREF and wait for market improvement or move some money into CREF STOCK, CREF GLOBAL EQUITIES, CREF EQUITY INDEX and CREF GROWTH?
Thank you for your opinion
I can’t predict the future any better than you can. If your pension and Social Security are enough for you to live on, you can be as conservative with your money as you like. The annuity gives you money you can’t outlive. Laddering gives you safety and flexibility. However, if you will need your savings to live on, inflation and taxes will eat up those low fixed-income returns. That portion of your savings that you don’t expect to need for 10 years or more could be diversified among the stock funds you mention.
The oil disaster is terrible. I hope the nature can regulate that in the future. The BP must do all against the spread of the oil. Otherwise we must bear the consequences.
Hi Jane,
I have read your books and took your advice about 8 years ago and have been in Vanguard Target retirement funds (I’m 39). And I’m a fan & love your advice.
One worrisome thing though is that the Dow is bascially where is was in 1998. So 12 years and you’ve made ZERO % in main stock index funds. Also, many bears out there are predicting another “lost decade”. Could we possibly see a 20 year period (1998-2018) where stocks index’s were flat? So you basically after inflation would lose money having your money in index funds for 20 yrs? Kind of like Japan where I believe the Nikkei has not returned to it’s peak 20+ years ago.
The last flat period lasted from 1966-1982–17 years. That was only price. Investors who reinvested dividends earned 7 percent annually, thanks to all the additional shares they bought when the market was down. So you have to look beyond price alone.
You’d also have made money on bonds and on international stocks. So diversification helps, too.
The question is, if you don,t index and diversify, what’s the alternative? Market timing (good luck!)? Finding a fund manager who will beat the market (only one out of 5,000 has ever beat the S&P for 15 years running, Bill Miller of Legg Mason. He crashed and burned in 2008 and was recently replaced). Cash in the mattress?
You see the problem
Thanks Jane that is very helpful and I agree with you:) Helps me to see other areas where gains can come from.
What do think about what some people are saying about the stock market dropping the next 10+ yrs as baby boomers start becoming sellers en masse of stocks and not buyers?
I know there is a lot of risk, but I have also thought about using a self-directed IRA to invest in low LTV private 1st mortgage notes. I’m in the real estate business and have a lot of real estate knowledge so that lowers my risk a little bit. I know this plan lacks liquidity and there is a lot of more legwork in terms of knowing foreclosure laws, appraising properties, risk borrower declares BK, etc… But the returns could be much greater and I could have more control.
Thanks so much for taking time out of your busy day to repsond and you are one of the few financial authors I really trust!:)
I’d say that the market has already dropped quite a bit without demographic help!
You have the special knowledge to invest in first mortgage notes. but be sure to diversify into other things. Illiquidity is only part of your mortgage undertaking. What are the foreclosure laws in your state and how long would it take to recover property if the buyer didn’t pay?
I think you’re too agressive. The traditional rule of thumb is to subtract your age from 110 and use the result as a guide to your equity allocation. Subtracting 40 from 110 gives you 70–roughly 70 percent in stocks, 30 percent bonds. I do agree that a single Target fund can do it all for you.
Thanks! I think I’m going to rachet down a notch to the Vanguard 2030 Target.