How to Invest: Would You Consider Single Stocks?

Do you invest in single stocks? If not, do you see yourself owning shares of a company one day? I think it’s a question a lot of people have. Very similar to my recent post about moving into taxable investing. However, this question relates more to the type of investment vs the investment vehicle. Most of us are in stocks via our mutual funds, target date funds, and index funds. But how many are into single stocks as well?

Reasons to Own Single Stocks

Why would you even want to own single stocks? We now have all types of investment options (target-date funds, mutual funds, index funds, etc.) that are designed to remove the risks involved with single stocks. So why would anyone want to own single stocks?

To clarify, I’m not referring to owning 1 share of something. By single stock I mean, x number of shares of one company’s stock (i.e. 100 shares of Google: GOOG).

There are a few reasons single stocks make sense for some people:

1. Company Stock – If you work for a company, you may have been given shares or options to buy shares of your company’s stock. This is great. And it’s excellent that the company wants you to own and invest in part of the business. If you’re lucky enough to own shares through a company stock purchase plan, I’d encourage you to explore ESPP flipping.
2. For Fun – Investing in mutual funds is about as exciting as watching paint dry. I talk a lot about maxing out your retirement accounts and starting up Roth IRAs. And I can see the collective eyes glazing over each time I do. I get it. It’s not exciting. That’s why I think some people turn to single stock investing. They see it as a way to do some real, hands-on, “stuff I can wrap my head around” investing. For instance, owning a share of Blockbuster stock is fun because you can walk into the store and use their service. You can invest your dollars in the company you own part of. Fun.
3. You’re Comfortable with the Risk – Another reason to invest in single stocks is because you’re comfortable with high risk. I’m not a risky guy. Single stocks aren’t for me. But I know there are plenty of 20, 30, and 40 year olds with cash out the wazoo who are looking to gamble on some companies. Nothing wrong with that if you’re fine with the risk.
4. You Can Create Your Own Allocation – Some people actually have the investing savvy to set up proper asset allocation with their portfolio using nothing but single stocks. These people are able to achieve with 50 stocks, for instance, what you are getting with your mutual fund. If you are the type that can set this up and actively manage your stocks, then go for it.
5. Dividend and Strategy Investing – I don’t know much about this topic, but I do know that some people like to invest in single stocks because of the dividends they produce. Or they use some other investment strategy that leverages the power of singles stocks. It’s my goal to know more about these strategies in the coming year.

Risks Involved with Single Stock Investing

As I alluded to above, there are some risks involved with single stock investing. The primary risk (compared to other investment choices) is that you aren’t able to easily achieve proper asset allocation (i.e. you have all your eggs in one basket). If the company you are invested in goes bankrupt, the stock price will tank, and you will lose your money.

Limit Your Single Stock Investing

Because of the risks involved with single stock investing, it’s often recommended that you keep your single stock ownership to around 10% of your entire investment portfolio. I pretty much agree with this philosophy. But I’m a very risk averse guy, and the primary reason I invest is to save for retirement. I don’t consider myself savvy enough to beat the market with my picks. Maybe one day I will be though.

Where to Buy Stocks

The best place to buy single stocks if you’re going to be actively trading them is at one of the best online stock brokers. These companies allow you to move your money around in and out of stocks with little or no fees. You don’t want expensive trading fees to cut into your single stock profits.

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Craig/FFB

I hear you about the Blockbuster example. I bought some Starbucks (the stock, but also the coffee) when Schulz came back as CEO. We love going there and the fact that we gotten over a 100% return is a nice bonus (or course we might have drank our way up to that stock appreciation ourselves!).

I have some other individual shares. My main portfolio is in my IRA and is diversified through various mutual funds. Individual stocks are a way to invest a little more specifically and to amble with some play money.

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Cee Howard

Why would an investor not buy WMT at a $52 low, reinvest the dividend of 2.2%, then in 10-12-15 or more years use that income, now probably doubled as dividends are raised yearly, as retirement income? McDonald's pays over 3 percent, same principle. Then there are Master Limited Partnerships in oil, gas paying 6-8% and Real Estate Investment Trusts paying similar amounts. You do not lose with Blue Chip, dividend-paying stocks. This is the Value Investing principle. No matter the downtrend, these stocks bounce back. Please, don't remind the people who lost tens of thousands on mutual funds 2007-2009. They're still hurting. They have yet to make it up. (Not that all funds are bad, but you might be surprised at some of the big losers.) Due to some friends' very bad experiences, I find it hard to look at a fund now. Dividends are a measure of a company's present value, and future increases are one measure of value to come. There are several other measures. My best to you.

Jeb

Buying stocks is like gambling to me! It's the best way to get a high return in a short time...if you pick a winner that is. I've been burned before as well....mostly off tips from friends on the "next big thing" stock. So far my gains have outweighed my losses. As far as the BB deal goes, 33 cents a share is well worth the risk. Look at Ford. I wish I would have picked up some of that last summer....but you never know.