4 Reasons I Don’t Buy or Trade Individual Stocks

Over the last few months, many of my friends have started investing. Because they know I love talking about personal finance, they will often ask me advice on which stocks to purchase. I tell them all the same thing: “I don’t buy individual stocks, I only buy index funds.” They usually seem a bit perplexed and want to know why. Here’s my answer:  

1. It takes a lot of work and timely information is difficult to find. As a busy doctor, I don’t have a lot of free time. Some weeks I work 80 hours in the hospital or have over 20 patient message to review. I barely have time to fold my laundry on a regular basis let alone do extra work, outside of work. When I do get a free afternoon or “golden” weekend in which I’m not on call at the hospital, the last thing I want to do is be productive. Most of the time, I just want to relax with friends and family eating good food or enjoying quality time. Trading stocks or researching companies to invest in, isn’t on my priority list.

Even if I did have the desire to learn more about various companies, finding good, timely, information can be quite challenging. Most of the time when information about a company is finally published it has already been known to Wall Street investors beforehand. This means it’s almost too late to make an investment decision that could make you money. For example, if I turned on the news and heard that Facebook was acquiring another company that could increase its profits, chances are the price of Facebook stock would have already increased to reflect this change. By the time lay people like you or I tried to capitalize on this potential increase in stock value it would be too late.

2. It requires substantial research on each industry and company. Although apps like Robinhood and Akorns have made purchasing individual stocks easier, they haven’t necessarily made it more profitable for the consumer. In order to actually make money when you purchase stocks you need to purchase companies that will increase in value and do so in a way that you will still make money even after you pay the taxes on your profits. This may sound easy to do initially. You may be thinking that you’d just purchase stock of Netflix and Facebook or Tesla and Apple then call it day. Unfortunately, it’s not that simple. If it were, everyone would do that.

There are some companies that seem to grow exponentially in ways we could never expect and other companies that seem to implode overnight. It’s difficult to predict which ones will make money over time and which ones will not. In fact, Wall Street companies spend millions, if not billions, of dollars each year on market research to help provide more information to help them make better predictions and investment choices. Even they still struggle to choose the right companies year after year.

3. The market is volatile and things change quickly. If 2020 taught us anything, it’s that life can be unpredictable. Random unforeseen events that happen in other parts of the world can affect us in ways we could never have imagined. These effects not only impact our daily lives, but they can have drastic effects on our economy and the success or failure of certain businesses.

Before the coronavirus, many of us would have assumed that airlines and travel industries would do remarkably well in the summer. The weather is great, kids are out of school, and most people have time off of work to go on vacation. We all got a rude awakening in March when the coronavirus pandemic put a drastic halt to almost all leisure travel and many airline industries found themselves on the brink of bankruptcy. Past performance isn’t always indicative of the future valuations and this makes picking and choosing individual stocks to purchase quite risky. Which leads me to my last point…

4. It adds too much risk and I don’t like losing money. When you buy individual stocks you’re essentially rolling the dice and hoping that the company’s stock you purchased will increase in value over time. As we mentioned before, stock prices are volatile. A company’s stock could be worth $20 today but then drop to $5 tomorrow due to some global tragedy or company scandal that you had no idea about. They best way to mitigate risk and decrease your chances at losing money (and increase your chance of making money), is to diversify your investments.

This means purchasing stocks in a variety of different companies from a slew of different industries. Since it would be too cumbersome to individually purchase all the stocks, most people such as myself, just buy index mutual funds. An index fund does the work of buying all the stocks for you. That way, your investments are diversified in a seamless, stress-free, risk-averse manner.  

4 Reasons I Don't Buy Individual Stocks

Investing in stocks has become increasingly popular over the last few years. Many people love the thought of owning part of their favorite companies/ Mobile apps such as Robinhood, Stash, and Acorns have made doing so seamless and easy. Although buying, selling, and trading stocks in the hopes of making a profit can be captivating, it may not be the smartest thing to do financially. Here are 4 reasons I don’t purchase individual stocks:

1. There are too many companies to choose from. There are thousands of different publicly traded companies in the world. This means there are many different stocks in a variety of different industries from which to choose. With so many options and a limited amount of money to invest, how do you choose which companies to invest in? Many people simply choose to invest in the industries and companies they have heard of the most. However, just because a company is well-known doesn’t mean it’s a good investment. There are too many options and many of the companies we have heard of may not be a the best investment. This brings me to my second point…

2. It is difficult to predict which companies will do well and which won’t. As the common investment saying goes, “Past behavior doesn’t predict future performance.” Just because a company has done well in the past, does not mean it will continue to do well in the future. You make money investing by purchasing stocks from companies that will continue to grow and make money over time. Although popular companies may continue to increase in value over time, it is also possible that some of these companies may have already hit their peak. If you make the mistake of purchasing stock in a company that doesn’t grow much over time, then you will have spent money on the stock without getting much in return. If you purchase the company stock and the company actually goes down in value, then not only have you not made any money, but you also may have lost money, which is the exact opposite of what you want to do when investing.

My point is that there are very popular companies that may go down in value in the next few years and there are also relatively new companies you may have never heard of that could increase in value over the next few years. It can be difficult to predict how each of the thousands of companies with stocks for sale, will do in the future. This brings me to my third point…

3. Useful and timely information that could serve as clues, is hard to find. Since predicting which companies will do well in the future can be challenging, large investment firms on wall street, like Goldman Sachs, Morgan Stanley, Barclays Capital, etc have hired entire teams of people in their “research” division to find information that could serve as clues about a certain company or industry. They do different types of extensive analyses in order to predict how well a certain industry will do in the future. For example, they may conduct surveys, talk to various industry experts, and examine behavior patterns to make investment recommendations that will increase their odds of making a profit and decrease their risk of losing money. Many people in the general public who like to invest try to do the same thing. They may read the Wall Street Journal and glean information from a variety of news sources to also get clues on which companies to invest in and which not to invest in. The problem with this information is that it isn’t always timely, which means it isn’t always useful.

Oftentimes, the investment firms on wall street, with their large research divisions and teams of experienced investors, have access to key information about various industries and companies long before it is published or spoken about in news sources that people in the general public have access to. In fact, there is a common thought among investors that by the time information is given to the general public it is “too late.” In other words, by the time you and I find out about a certain company that is struggling, many experienced investors have already sold their shares of those stocks. By the time you and I find out about an up and coming company, investors on wall street have already purchased those stocks at the lowest price and made their own profits. Investment information is just not as readily available to members of the general public to allow us to make the best investment decisions at the best times. This brings me to my last point…

4. Purchasing individual stocks can decrease investment diversity and increase risk. Even if you did have access to timely information, purchasing individual stocks is still risky. Human behavior isn’t always rational so our rational predictions about what items people will purchase over time and which companies will grow as a result don’t always line up. In fact, many people who have investment portfolios that are actively managed by investors at the biggest wall street investment firms still lose money. Only one third of actively managed funds (in which investors pick certain stocks for their clients to purchase) actually beat the market index. This means most funds that are managed by experienced investors at the largest investment firms who have access to lots of information still do not out-perform people who simply invest in index funds.

An index is a group of many different companies in a variety of industries. An index fund is an investment fund that follows an index. In other words, instead of picking and choosing which individual stock to purchase, an index fund will simply purchase all the stocks in that index, which includes hundreds or thousands of different companies. By investing in an index fund, you are a partial owner of all the stocks in that index. There are many different types of index funds such as the Total Stock Market Index Fund (that includes all of the major stocks in the United States) and the Total International Stock Index (which includes all of the major stocks around the world). The benefit of purchasing an index is that you are a partial owner of almost all of the stocks. if one stock does really good then your investment increases in value but if another stock does poorly you have not lost that much money since you have so many other “good” stocks that can cushion the blow. In other words, index investing creates diversity (since you are invested in so many different companies) which protects investors from the risk of losing too much money. Purchasing individual stocks is the opposite of that. Buying individual stocks decreases the diversity of your investments (since you have a larger portion of your money tied up in the stock from one company instead of having that money distributed among many different companies).

My point? I don’t purchase individual stocks because I don’t have a crystal ball. I can’t predict the future or accurately tell which companies will do well and which won’t. The safest way to invest and still make money when you can’t predict the future is to limit your risk. You limit risk by purchasing a piece of all the stocks, that way if one company does poorly the other companies can help mitigate the risk and the make up the difference.