At the beginning of 2015, during a moment of sheer insanity, I veered from my sound strategy of DIY investing and bought some single stocks. Over the last 2 months, I vowed not to sell no matter what happened (see my story about Bob, the world’s worst market timer). I also vowed never to veer from my investing strategy and buy single stocks or specialized mutual funds again.
So what did I buy?
Royal Dutch Shell and British Gas stocks. I thought they were cheap due to the decline in oil prices plus my friend who’s a finance professional explained “now is the time”. After I bought, both stocks dropped 15%. I bought some more. They dropped another 10%. Ugh.
Fidelity Select Biotechnology Portfolio Fund. I’d been watching this fund roar for over a year and decided the good times within the biotech industry were poised to continue. Two months after I invested, Hillary Clinton made some policy statements regarding capping the price of medications, and the fund dropped 16%.
The problem is once we buy individual stocks and watch them free fall, our natural instinct is to head for the exits, take a loss and search for greener pastures. I have no doubt in my mind these stocks will rebound. How long it will take? Only the mystical Lord of Wall Street knows.
This is why purchasing single stocks is so risky. Sure you might hit a home run now again, but most of us average investors don’t know when to enter and exit stock positions.
Earlier this year I purchased some Netflix shares the day before their earnings report. The earnings were favorable and stock jumped 20%. I sold. Three months after I sold, the stock split and rocketed upwards. As much as I study the financial news, I still had no clue on how to time the Netflix stock.
This is why I won’t be buying single stocks anymore. Stocks are prone to unexplainable movements. On September 29th 2015, Apple reported record earnings yet the stock dropped 3%. On top of these inexplicable movements, I’m a victim of my emotions (especially during volatility). When times are good I want to buy, when they are bad I want to sell. This is the opposite of good investing.
I urge you not to succumb to gambling urges buy buying single stocks. Stick to long term low cost index investing. Your portfolio will thank you in the long run.