Forget watching share prices and buying single stocks. It’s time consuming, risky and there’s a better way.
Do you check share prices daily looking for the next hot stock? Forget it. If you were to ask old school retirees what their investment game-plan looked like throughout their lifetimes, I bet most replies would be:
Step 1: Find financial advisor recommended by a friend or family member
Step 2: Give money to financial advisor to build nice stock portfolio
Step 3: Happily pay advisor, platform and trading fees
Step 4: Check share prices daily, worry when they are down
Step 4: Accept 5-6% return because it’s better than bank savings rates
Step 5: Hang on and hope for the best
Some adventurous types may have built a DIY portfolio of blue chip single stocks. Good old dividend paying companies such as British Gas, Shell, Barclays, and Rolls Royce.
When you manage your own DIY stock portfolio, not only will you spend countless hours checking share prices and worrying, you may be bitten by the stock trading bug. Here’s how the bug affects us.
Our financial genius fools us into thinking we know something about the stock market others don’t. We can attempt to miraculously time the market by checking share prices and trying to buy low and sell high. Many times after we sell a stock, we are struck by remorse when said stock rises 5% the day after sale. The same remorse washes over us when we buy shares and the prices drop by 5% the very next day.
It’s as if these companies we own the shares in are mocking and punishing us for making the wrong decisions at the wrong times. How can it be that a stock drops 10% despite beating its earning estimates? We even spent time pouring over the financial reports, just like the professional traders do.
Unfortunately there is no preventative vaccine for the stock traders bug.
Onwards we continue until the inevitable day arrives where we buy shares, only to find the market in free-fall. Next comes the irrational doomsday “the market will never rebound” thinking, followed by panic selling for a loss. This is called emotional investing and if you can relate, you are not alone. I dare to say anyone who owns stocks has experienced this, myself included.
While our stock picking effort might strike gold on occasion, buying single company stocks is extremely risky. Only those with a truly disciplined buy and hold mentality can survive the single stock investment roller coaster. The most successful passive investors avoid checking share prices. In fact they sometimes elect not receive monthly statements and only check their portfolios once a year. This strategy removes emotions.
Millions of people saw their retirements flushed away when they panic sold stocks in 2008-2010. If they had avoided checking share prices and reading the doomsday news, they would have held onto their stocks and their portfolios would be worth more now than ever.
Company mis-management can also sink the stock price. All it takes is one company cock up and your beloved share can flush years of gains down the toilet. Yes I’m talking about you VW, Mitsubishi, Enron, Lumber Liquidators, Northern Rock.
Let’s look at a few examples of some darling stocks which have quickly fallen from favour (as of June 2016).
Apple peaked in 2015 at $134 and now trades at
$104 $97 as of June 2016. Apple continues continue to post strong profits, has a low price to earnings ratio and keeps more cash than most countries, but yet still the stock price is depressed.
Financial company Aberdeen Asset Management is trading down 37% from April 2015-2016. Looks like they’ll need to raise invest fees management fees to raise profits.
Lloyds Bank, the English banking staple, once traded at £6 per stocks and now trades 89% lower at under 70 pence per stock.
Chipotle, America’s $12bn burrito company traded at $700 per stocks in October 2015. E-coli struck a tiny portion of their restaurants and people got food poising. Consequently the stock suffered falling to $400 in January 2016 and now sits at $442 in April 2016.
Mitsubishi motor cars is currently trading at $4.68 after it admitted fudging its emissions numbers for 25 years. The stock once traded at $13 in August 2013. That represents a loss of 64%!
If Mitsubishi was in your portfolio, chances are your financial advisor has sold the stock at a loss and charged you a nice fee for doing so. If you own it in your DIY portfolio, you’ve probably considered panic selling.
Several studies concluded that 92%+ of average amateur stock pickers lose money through mistiming, fees and poor emotional decisions. If most Wall Street professionals can’t time the market correctly, how could an amateur?
If your reading this article feeling depressed, don’t worry you’re not alone. I’ve made the same mistakes and paid my stupid tax. Before I knew better I bought Apple stocks at $115 (currently $104), and bought Shell at £18.57 and sold at £16.94. I also bought AT&T at $30 and sold at $36, bought Verizon at $42 and sold at $50, and bought American Tobacco at £38.25 and sold at £40.65.
Why am I telling you this? When I purchased these stocks, I told myself I would buy and hold for 20+ years. But suddenly I was bitten by the stock traders bug and sold because I thought the market was overpriced and I was some kind of genius trader. My solid game plan was quickly overtaken by emotions.
The average stock portfolio looks something like this:
Some stocks have grossly outperformed and some have underperformed. Factor in trading and platform fees and you soon understand why picking single stocks is so difficult. Throw in the emotional urge to check share prices and the daily and now hopefully you can see why single stock portfolios are worrisome. Add financial advisor management fees and mistiming the market, now returns really start to fall behind.
So what is the alternative?
Buy index trackers, keep buying and holding through the highs and the lows, collect dividends, experience the wonders of compounding interest, live happy and retire rich.
Stop checking share prices and stop buying single company stocks. Also write an investing statement and stick it to your computer monitor, it will help fight off the stock traders bug.
Next read this: The Best Tracker Funds