Why We Don't Recommend Buying Single Stocks
Updated: Jul 10, 2022
You may have heard a simple model of investing in stocks: pick some companies you think will do well, buy those, and hope they do well.
We at OnlyFunds would never recommend this approach. Here's why:
You're Exposed to Company Risk
Risk is the name of the game in investing. Everything you put your money will have risks in it, which are different ways you could lose value. Generally, the more risk you take on, the more money you can get for it. Putting money in your savings is very low risk, but you get a measly 0.06% for it. Stocks on the other hand, have more risks. The company could go bankrupt, and your stock investment would be worth $0.
In professional investing, one day we deal with these risks is diversification. That means selecting investments that, as a group, have offsetting risks, so that when something bad happens to one part of the portfolio, something good happens in the other part.
If you choose a single-name stock, you're taking on a whole lot of undiversified risk. One of the biggest is company risk: the risk that that company will do poorly. There is a lot that can go wrong for a single company. One bad tweet from Kim Kardashian wiped out billions of dollars of Snapchat one day. Lehman Brothers went bankrupt overnight in 2008. Amazon, Facebook, and Netflix - three well known strong companies - have had single where they lost 10%, 25% and 35% of their value this year.
The solution: buy all the companies in an industry, or all the companies, period. This is whats called an index, or a basket of a bunch of companies, and it's how OnlyFunds gets its exposure to stocks.
Most of the time, if one company fails in an industry, other companies will do well. If one clothing retailer struggles (looking at you Abercrombie and Fitch), other clothing retailers will pick up the gains. If you own all the clothing retailers, this risk will balance out, and you get the growth of the industry as a whole. You can even apply this to owning all the sectors: if you only own tech stocks, and tech stocks do poorly, you're out of luck. If you own all the stocks while tech stocks take a beating, some other sectors may do well and your portfolio balances out.
Your portfolio will also not be diversified across other risks. For one example is company size or sector. All your favorite companies may be big tech companies, or concentrated in a certain industry, meaning they'll all go up or down in concert, potentially destroying your hard-earned wealth.
You Miss Out on All the Other Fun
Similarly to how you want to diversify your stock portfolio across things like company size and industry, you want your entire portfolio to be diversified across different types of assets. With only investing in single-name stocks you can research, you miss out on:
Just how different companies and industries will behave differently at times, different assets also go up and down in value differently. At OnlyFunds, we use Modern Portfolio Theory (which you can read about more on the How We Invest page) to select the right balance of assets for your personal risk level. Then we make sure to keep those assets balanced in the right proportions, all without you having to lift a finger. Just investing in stocks robs you of all these benefits.
It's Hard, It's Stressful, and Even the Pro's Mess it up.
Professional stock pickers spend their entire weeks (sometimes 80 hours a week) poring over company financials, doing complex analysis, and making calls to figure out the best stocks to pick. These people have degrees, fast computers, and all the data in the world - and still, a whopping 92% of them fail to beat the market. It's incredibly hard to pick the winners out of the crowd of stocks because they're so unpredictable.
One 2017 study found that only 4% of the stocks accounted for all the extra return of the market. You can either bet that you're smarter or luckier than professional money managers, or probably miss out on all the gains that owning stocks actually provides.
It's also stressful! Having a lot of your portfolio in something that could possibly lose 30% of its value overnight is scary. No one needs that stress in their life, especially when it comes to money.
So how do we recommend doing it? Let OnlyFunds take care of it.
We don't try to pick the best stocks, we make sure you're positioned right for any environment. The aim is to protect your money during downturns and capture the upside when things are good. Instead of trying our hand at the Stock Market Casino, OnlyFunds:
asks you questions about you and your financial situation to determine the right risk level for you.
only invest in assets and broad basks of stocks to get the right exposure. That means buying things like Gold, Treasury Bonds, Corporate Bonds, Value Stocks, and International Stocks.
balances the different asset classes in the right proportions to maximize the returns for your level for risk using modern portfolio theory.
There's never a minimum account balance, and it takes 5 minutes to open one. Start saving today and Open an Account.