While I’ve put about 30% of my public stock portfolio into individual stocks, I wouldn’t advise the average person to go beyond 10%. Why? Because beating the various indices over time is tough. Sure, there are no fees for owning individual stocks compared to index funds, but the real cost is your time and attention.
I was reminded of this when Bed, Bath, and Beyond’s stock started skyrocketing. As a shareholder, I was thrilled! But then I took a closer look at my rollover IRA.
Back in 2014, I bought a fixer-upper in San Francisco. We needed some home essentials, so we went to Bed, Bath, & Beyond. There, a clerk named Greg shared his inspiring story of overcoming homelessness and alcoholism. Inspired, I bought $11,000 worth of Bed, Bath, and Beyond stock the next day. At the time, it was about 2.8% of my portfolio.
Fast forward to now, and Bed, Bath, & Beyond’s stock was all over Twitter for its sudden rise – over 400% in a month! I had to check if I still owned shares. Turns out, I only had 200 shares, and even after the surge, I was still down about 60% from my 2014 purchase price.
Why is investing in individual stocks so hard?
-
Companies don’t last forever. Big names like Pan American Airways and Lehman Brothers are no more. So, you always have to keep an eye on your investments.
-
Competition is always increasing. If a company is profitable, others will compete until profits decline. That’s why it’s safer to invest in an index fund with many companies.
-
Some stocks are more volatile than others. This can lead to emotional investing, which is not good.
-
You might not own enough stock to make a difference. If you don’t pay attention, you could let your losers lose for too long.
-
You might own too many stocks to make a difference. Lack of discipline can hurt your portfolio.
Even index funds are actively managed. For example, an investment committee at Standard & Poor’s decides which companies are included in the S&P 500 index.
If you’re not interested in keeping up with the stock market and analyzing companies, you probably shouldn’t be investing in individual stocks. For those who are interested, I think a 90% passive index funds / 10% active individual stocks split is appropriate.
Even for investing enthusiasts, I think the most one should invest is 30% in individual stocks and active funds. Any more and you’re likely taking on too much risk.
Remember, about 80% of active equity fund managers underperform their respective indices over a 10-year period.
My main reason for investing now is to generate enough passive income so I can do what I want. I don’t want to spend a lot of time managing my investments.
This latest absurdity in BBBY’s share price has reminded me to pay more attention to equities. I will aim to invest at least 70% of my public equity portfolio in the S&P 500 and other indices.
As for my Bed, Bath, and Beyond shares? I sold half and will hold onto the remaining 100 shares for entertainment.
In addition, one of the most interesting funds I’m allocating new capital toward is the Innovation Fund. It invests in artificial intelligence, modern data infrastructure, development operations, financial technology, and real estate & property technology.
So, keep your investing simple!
