It can be tempting to invest in individual stocks. The best-performing stocks each year will always beat the indexes by a large margin. However, picking which stocks will beat the index is easier said than done. Even professional money managers with decades of experience have trouble beating index funds with any consistency.
If you do invest in individual stocks, keep it to no more than 5% of your investable portfolio. Here are a few reasons why we don’t think it’s a good idea to invest primarily in individual stocks.
- You get emotionally attached. Your day-to-day mood becomes directly affected by the stock’s performance that day. When it’s up, you’re so happy, but, when it’s down, your mood is down, too.
- You have the Financial Order of Operations out of order! By purchasing individual stocks, you are putting all of your eggs in one basket. You are focusing on the “get rich quick” rather than building wealth. The Financial Order of Operations (FOO) teaches nine tried-and-true steps that help you maximize your money and get on solid financial footing before trying individual stocks.
- Success can still ruin you. Let’s say you buy an individual stock and you are right! If you double your money and sell, it’s a win! Right? What if the stock continues to go up after? The ideas of “what could have been” and “what might happen” can spur on overly risky behavior or continue to haunt you forever.
Check out the video below for information on different types of investments and which ones you should choose.
