Should We Buy Individual Stocks Anymore?
In the aftermath of the Federal Reserves bailout of Bear Stearns, I have begun to wonder if buying individual stocks is worth the risk anymore. As you have probably heard, the Federal Reserve recently coughed up 30 billion dollars in loans to J.P Morgan to purchase the struggling Bear Stearns for $10/share. Not only does this raise questions as to the validity of buying individual stocks, even from companies that appear to be financial solid like Bear Stearns once was, but this recent move also raises flags as to why the Federal Government will take a chance with taxpayer monies to save a financial institution, which made horrible decisions. If J.P. Morgan falls in the same footsteps, the taxpayers are the ones taking the hit. On the flipside, if the Federal Reserve does not take this drastic step, our economy would take a major hit, which would affect us all too. It was a tough call, I am glad the decision was not mine.
Back to the issue at hand - investors in Bear Stearns are the ones who really got the rod in the rear. Their shares, which were valued close to $100/share in recent months, tumbled to $10/share, in the blink of an eye. Everyday Main Street investors lost thousands in this deal, thousands that they no doubt could not afford to lose. If you ask owners of Bear Stearns if they think, it’s worth owning individual stocks vs. funds, I’m sure they would answer in unison, “no.”
It’s easy to think the Bear Stearns fallout was a fluke deal and this won’t happen to the companies in my stock portfolio, but deep down, you know it could happen. All investment advisers will tell you not to put all of your eggs in one basket, and that a diverse portfolio is the key to surviving bumps in the market. However, even those who have proper allocated portfolios, primarily by owning individual stocks in different sectors, can have a hard time recovering if just one company goes under. Because investors who choose individual stocks over funds rely on the success of only a handful of companies vs. hundreds, like those who invest in funds, they face the risk of losing significant amounts in short periods.
The innovation in our marketplace is at a point where investors have choices not even imaginable back when Warren Buffet was starting out. These advances in financial products have given investors the upper hand to fend off major losses, by allowing complete diversification in the purchase of single security i.e. a basic index fund ETF. Because of this, I’m starting to doubt whether I should ever take the risk of purchasing individual stocks again. My investment style is one where I do not take extreme risks and prefer long-term slow gains vs. instant gratification gains. Index funds offer me everything I can ask for in an investment, diversification, low costs, and a long history of success. In fact, look at most mutual funds over a long period, they don’t even come close to achieving the gains a simple index fund provides, which proves trying to beat the market every year is probably not feasible or realistic.
Ignoring those with high investing risk tolerances, should we even dip our feet into the potentially ice-cold waters of individual stock picking? I am starting to think not. $
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Comments
I too own shares of individual companies; however, as passionate as I am about these particular companies has no actual bearing in the actions of the board, the Chairman, and their business models. Basically, you never know and this is what makes me increasingly hesitant.
For the most part I agree with you. But I do own shares of a few companies that I identify with, or feel passionate about.