Is it really worth it to invest in individual stocks?

[ERD50]

The only reason I own individual stock (BRK-B) is because it is kind of an equity mutual fund ...

I own it for that, and because in my taxable account, it kicks off no dividends. I'm trying to limit my income while I do Roth conversions before RMDs come into play.

 

[Al18]

My individual stock holdings have served me well. They are mostly in my brokerage account and dollar wise, comprise about 15% of my assets. I enjoy taking advantage of the 0% LTGC bracket.

 

[Ballhawker]

"Is it really worth it to invest in individual stocks?"​

I guess it depends on your definition of "worth it". What's your motivation or goal? It's good to ask ourselves lots of questions before putting our hard earned money to work. It has been proven time and time again that consistently investing in low cost total market or S&P 500 funds such as VTI or VOO beat individual stock portfolios. With this data in hand, why would I choose to try to "beat the market"?

I learned the hard way a long time ago that there is no easy way to get rich quick in the stock market. There is only so much (very limited) information publicly available on any given company and things change quickly in business. Companies issue "forward looking statements" and are always optimistic about their own business prospects. It often doesn't turn out the way they had hoped or planned. As an individual investor, I am likely the last to learn of company problems, only after the share price has dropped.

There is nothing wrong with investing in individual stocks or sectors to meet specific financial strategies and goals, but it needs to be consistent with an individual's personal risk tolerance. Any one stock investment should be a very small percentage of overall portfolio.

Be honest with yourself about how risk tolerant you really are- another of my "school of hard knocks" investing lessons. If a stock were to drop by 30% in a short time, how would you react? Would you stick with it, or take the loss because you can't sleep at night?

 

[TheWizard]

Yes, people need to remember that the typical S&P500 index fund has about 33% of its holdings in the top ten stocks by market cap.

The typical "100 index fund", i.e. QQQ, has about 50% invested in the top ten stocks by market cap.

Large cap growth mutual funds, i.e. FBGRX, TRBCX, have about 66% invested in the top ten stocks by market caps.

The result is that most people are in essence buying individual stocks. The bottom 50% of the holdings in any index fund is essentially dead weight, it does drag down your performance (though it does lessen volatility.)

Well, sort of.
But unlike owning real individual stocks, when something like Kodak or GE declines in value significantly, your index funds compensates for it and allows the new winners to rise to the top...

 

[Qs Laptop]

Well, sort of.
But unlike owning real individual stocks, when something like Kodak or GE declines in value significantly, your index funds compensates for it and allows the new winners to rise to the top...

Not quite. If a Kodak goes belly up it might have been, for example, stock #189 out of the 500 stocks in the index fund. It might comprise 0.02% of the entire index. What "winner" is going to take its place? Stock number #190 out of 500, comprising, yep, 0.02% of the index. Remember, in the S&P500 stocks are ranked by market cap, not performance. It's unknown whether stock #190, which is replacing Kodak at #189 by virtue of its market cap, is a winner or not. In other words, not much is going to change.

 

[motley]

Individual stocks - big names that are already in the S&P? Not really worth it.
Little stocks that are more obscure? Only worth it if you bet right - it's just dressed up gambling, even if you "do your research"

And you can go "oh but my pick of XYZ beat the market!" - yeah so did my 40 shares of facebook I bought on IPO day. But that's just luck.

About sums it up for me. And as I get older, I don't have the desire or patience to put in the work it would take to even make best guesses on a good stock...and the whole thing is just too potentially volatile for my tastes. I'll take boring ol mutual funds for $100 Alex.

 

[Zathras]

I prefer individual stocks.
It does take research, and it can be more volatile.

On the flip side, your money is invested exactly where you want it, there are no additional fees.
You also have complete control over capital gains.

Stock funds are investing in individual stocks. They just invest in lots of them. I have about 20 stocks which likely overlap substantially with many stock funds.

If you don’t care what companies you are invested in, funds give you great diversity and require little work. The cost is generally small, but it does exist.

 

[aja8888]

I prefer individual stocks.
It does take research, and it can be more volatile.

On the flip side, your money is invested exactly where you want it, there are no additional fees.
You also have complete control over capital gains.

Stock funds are investing in individual stocks. They just invest in lots of them. I have about 20 stocks which likely overlap substantially with many stock funds.

If you don’t care what companies you are invested in, funds give you great diversity and require little work. The cost is generally small, but it does exist.

Besides having control of capital gains, you can also have control of capital losses.

 

[motley]

If you don’t care what companies you are invested in, funds give you great diversity and require little work. The cost is generally small, but it does exist.

I don't think opting for funds means one doesn't care what companies they're invested in. I absolutely look at that when considering funds.

 

[TheWizard]

Not quite. If a Kodak goes belly up it might have been, for example, stock #189 out of the 500 stocks in the index fund. It might comprise 0.02% of the entire index. What "winner" is going to take its place? Stock number #190 out of 500, comprising, yep, 0.02% of the index. Remember, in the S&P500 stocks are ranked by market cap, not performance. It's unknown whether stock #190, which is replacing Kodak at #189 by virtue of its market cap, is a winner or not. In other words, not much is going to change.

Stocks drop out the bottom of the S&P 500 all the time and are replaced with new stocks with larger market cap.
All of the Magnificent Seven stocks are relatively new additions to the S&P 500; they certainly didn't exist when I started investing in 1973.
But like magic, I own quite a bit of them now without having to sell any of those failing companies.

That's all I meant...

 

[OldShooter]

... my net worth seems to just track the market ...

You are doing well; better than most. Remember: Better is the enemy of good.

I saw a very short video a few years ago, an interviewer talking to Mr. Modern Portfolio Theory, Harry Markowitz. It went like this:

"Dr. Markowitz, do you think is it is a good idea for small investors to buy individual stocks?"​

​

"No."​

A few years ago when I was developing my Adult-Ed investing class I spent a bunch of time with a TDAmeritrade branch manager. At that time TD's business focus was on day traders. After an hour or so we were pretty comfortable with each other, so I asked: "How did your day traders do in the market last year?" There was a long, embarrassed pause, then she said "One and a half percent." That would have been 2017, when the market indices were up between 20% and 40%.

 

[MichealKnight]

I own it for that, and because in my taxable account, it kicks off no dividends. I'm trying to limit my income while I do Roth conversions before RMDs come into play.

Hardly a seasoned investor here - frankly I shunned what I called "paper assets" for a long time.

I don't get religious. To me religious means absolutist. "No individual stocks!" when indeed the mutual funds and ETFs I hold are - wait for it- individual stocks. Is it worth it to me to hold individual stocks? Simply put when they go up - yes. When they go down - no. But ANY stock - be it MSFT or NVDA or Coca Cola goes up or down. If it's in my mutual funds - well - it goes up or down. Recent examples for me:

GM: I had said years ago here I was sort of in the know but not an insider and I was buying - I think it was in the low 20's. About 48-49 now. Did I "beat the market?" doubt it, I don't know. But hey, it went up enough I'm happy.

RYCEY: Speculative pick 1+ year ago - up 240% - yeah - happy with my individual stock..

SLB: Grrrrr it's down 10% now during my 6 month holding period. Not happy with my individual stock.

Big Tech: I hate tech. I frankly have little interest. So on that one - it's QQQ all day long. I figured tech owns people, I'd like to own them too but I have zilch knowledge about how a GRU works, or who the latest competitor is so yeah - I love the ETF concept of just spreading it out.

OBSOX: Other than just being a putz with a Google connection. I really have no avenue of investigating small cap stocks. But Mr Oberweis is the manager of this fund and based on writings and interviews I"ve seen with him since I was in my 20's----I feel good about him making those decisions hence my small caps are 100% mutual fund.

Utilities: Sold some individual stocks yesterday for perhaps 25% tax-advantaged cap gains -- this was half my utility holdings. Kept XLU.

I don't feel this makes me a "trader" or "day trader".

Mind you I know someone who just sold a boatload of his Apple. And a bunch of his Bank of America. And someone who works for him who just sold a TON of stock in this company called Berkshire or something like that. I hardly think they are 'traders' or 'day traders'.


Again, only been at this retirement thing and stock market stuff for 4 years now.

Right now, 35% in stocks, 25% physical real estate, 10% gov bonds, 10% corporate bonds, 20% CD/MoneyMarket etc

 

[Koolau]

The first 401k I had was with Boeing. I started investing into it the last two weeks of 1997 (we got paid every week back then), and stopped investing at the end of 1999, when I went to another company. When I left the company, it had $6322 in it, and its cost basis was $5810. So, it hadn't made much, in those first 2 years and two weeks.

But, it ended up peaking out in early 2019, around $61,000. So that's a return of what, about 10.5X over roughly 21 1/2 years. For most of that, it was very heavily invested just in the Boeing stock fund, but in its later few years, I started moving some of it into their bond fund and their SP500 fund. So, when Boeing crashed, that helped soften the blow, somewhat.

I finally rolled it over and combined it with another rollover IRA I have, in January of this year. It was down to $45,500, so it had taken quite a blow, compared to 2019. So, it was still roughly a 7.8X return. Still not too shabby I guess, over the course of roughly 26 years and a month.

Just out of curiosity, I put in that same rough date range (11/30/97 through 1/31/24) into a chart on Morningstar's website, using Fidelity's SP500 fund (FXAIX), and it gave me a 710% return So, considering a 7.8X return is really a 680% return, even in this case, it seems I would have done better just keeping it all in their SP500 account

Heh, heh, not so with my Megacorp stock. It has done WAY better than any index and a lot of individual stocks, but YMMV.

 

[luckydude]

To answer OP's question, it's not worth it for me.

For my equity investment, I just stick with index + a couple of specialty funds. I have more than enough, so I prefer to use my time for enjoyment instead of on picking stocks in hopes for outsized returns that I neither need nor care about.

 

[SnowballCamper]

I tried some stock picking early on and it was not worth it. Then I went with the a bond fund and a couple stock funds. Then I learned what happens when interest rates rise on the bond fund. Now I I do stock index fund and chase treasury yields while holding to maturity.

 

[Midpack]

I prefer individual stocks.
It does take research, and it can be more volatile.

On the flip side, your money is invested exactly where you want it, there are no additional fees.
You also have complete control over capital gains.

+1. I don’t own any individual stocks anymore, but I was 100% individual stocks for the first 15 years investing. We ‘won the game.’

Most people are better off with mutual funds, because most people don’t have the discipline or knowledge to properly research and follow individual stocks. And many people can’t handle the volatility without panic selling, almost always a mistake. If you have to ask, you probably shouldn’t invest in individual stocks, you’d know what it takes.

 

[ERD50]

.... Most people are better off with mutual funds, because most people don’t have the discipline or knowledge to properly research and follow individual stocks. ...

And even if they do have the discipline, and do the research, studies show it is unlikely that they will beat the market on average (well, maybe half will and half won't, but which half will you be in?).

One advantage of individual stocks that I will agree with, is added flexibility in taking gains and/or doing some tax loss harvesting in a taxable account. Though I accomplish some of that with different, but similar funds/ETFs.

 

[Montecfo]

+1. I don’t own any individual stocks anymore, but I was 100% individual stocks for the first 15 years investing. We ‘won the game.’

Most people are better off with mutual funds, because most people don’t have the discipline or knowledge to properly research and follow individual stocks. And many people can’t handle the volatility without panic selling, almost always a mistake. If you have to ask, you probably shouldn’t invest in individual stocks, you’d know what it takes.

Yes. And if you follow the Dalbar studies you know that investors in mutual funds for example capture around half of the market return in stocks and in bonds!

So if you do have the demeanor it is pretty easy to be much better than market counterparts.

 

[FREE866]

I proved to myself a very long time ago I was an awful stock picker. Maybe some people on this board are unique, but I've never met anyone in "real life" that can do it successfully consistently.

ETFs changed my life when I surrendered to them over 20 years ago. They're now effectively zero cost ( except for small expense ratio), tax efficient , liquid and most importantly I don't have to figure out "when to sell" as I think is very important when you're an individual stock picker.

 

[Alex The Great]

I prefer to use my time for enjoyment instead of on picking stocks in hopes for outsized returns that I neither need nor care about.

This is funny but I do have 45 stocks in taxable account and 34 in Roth IRA exactly for the same reason. I enjoy the process of following up with each individual stock. Do this approach provide a greater return? Unlikely but it keep me busy and informed about the development around those businesses.
I also have index fund and dividend ETF which may overlap with some of my holdings but I don't see it as a big deal as long as some diversity across different sectors is achieved.

 

[TheWizard]

Yes. And if you follow the Dalbar studies you know that investors in mutual funds for example capture around half of the market return in stocks and in bonds!

So if you do have the demeanor it is pretty easy to be much better than market counterparts.

Not familiar with Dalbar studies so I'm puzzled by your statement. I'm pretty sure my holdings in VOO capture 99+% of the S&P 500's total return year after year.

But, of course, I'm a buy and hold guy, not one of those market timers you hear about...

 

[GrayHare]

Not familiar with Dalbar studies so I'm puzzled by your statement. I'm pretty sure my holdings in VOO capture 99+% of the S&P 500's total return year after year.

Many individual stocks outperformed the S&P 500. If you can pick those outperformers, which takes study and does not always work out, you can beat the S&P 500.

 

[Al18]

I did a study last year on a market weighted SP500 index fund. The results:
Top 10 companies held 32% of the fund
Next 90 companies held 39% of the fund
Next 100 companies held 14% of the fund
Next 100 companies held 8% of the fund
Next 100 companies held 5% of the fund
Last 100 companies held 3% of the fund

Stated another way, you have invested about 100 times as much $ in each of the top 10 companies as you did in each of the bottom 100 companies. If you want to invest evenly across all 500 companies, the the equal weighted SP500 fund RSP is what you want.

 

[TheWizard]

Many individual stocks outperformed the S&P 500. If you can pick those outperformers, which takes study and does not always work out, you can beat the S&P 500.

Well, yes, but I'm not sure that was Montecfo's point.
And I find that my investments in QQQ, VGT, and MGK have beaten the S&P 500 in recent years...

 

[ERD50]

Many individual stocks outperformed the S&P 500. If you can pick those outperformers, which takes study and does not always work out, you can beat the S&P 500.

If by "does not always work out,", you mean about half the time. I agree.

Well, it's actually easy to pick the out-performers after the fact! Just look them up. But picking them from the under-performers years ahead of time? That's proven to be a tough one to do consistently.