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Mistakes Made When Investing in Single Stocks

There are two kinds of investors. There are investors who have fun keeping up with the market and doing trades. They read the Wall Street Journal every day, and they talk about single company stocks at the water cooler. Then, there are those that just want to invest because it’s the right thing to do and they want to grow their money enough to retire with it. The other investor ultimately wants to make enough to retire with as well, but their approach is different. They have a different level of risk. Before you go any further with investing, you need to sit down with yourself or you and your spouse and evaluate the level of risk you are willing to tolerate. Single stock gurus make millions of dollars every year writing books, speaking to investors, developing websites, and hosting television shows to give advice about the next hot stock or the latest news about a merger or stock split. Mutual funds are not sexy. Very few financial media personalities discuss which mutual fund is the best to buy today. However, we know that mutual funds are an extremely effective investment vehicle, and the best part about mutual funds is that expert fund managers do all of the diversification and stock trades for you. However, there are plenty of you out there that want to put together your own portfolio of single stocks for investment. You might also be someone who has a retirement account with mutual funds, but you just want to pay around with 10 or 20 grand by selecting single stocks on your own. Whatever your situation, be mindful that selecting single stocks on your own is a risky practice. My personal investment strategy solely involves mutual funds, and it will eventually involve real estate when I have enough money to invest in it.

Realize that there are mistakes to be made when investing in single stocks. Here are some finance 101 mistakes to avoid.

  • Poor Portfolio Diversification. Diversification is essential to your portfolio. Investing in 5 different company stocks is not diversification. Selecting 25 to 50 stocks for each type of stock company is getting closer to a well-diversified portfolio. Depending on your tolerance of risk, you need to have a mix of small-cap, mid-cap, and large-cap stocks along with some foreign stocks to balance your portfolio when the entire American market is down. I’m not a professional, but this is common sense. If you are playing around with 4 or 5 stocks, then you’re probably a day trader. You might as well put your money down at the craps table in Caesar’s Palace.
  • Not Monitoring your portfolio’s performance. You need to know who the big losers and winners are in your portfolio. It’s tough to know when to dump a stock and when not to dump it. I would say that if the stock has shown no signs of life after a year or two, then dump it and look for an emerging company with high growth potential.
  • You don’t know as much as you think you do. This is will be a hit to your ego, because many who invest in single stocks have the ego of Mt. Everest. Realize that you don’t do this on a daily basis and there are people that do. You need to have control over your money, but you also need to seek the advice of a professoinal to help guide your decisions. Just make sure that your advisor is giving your unbiased advice and not trying to steer you towards a product that will give him or her a fat commission.
  • Not being disciplined. If you want a great model for investment discipline, think of Warren Buffet, the Oracle of Omaha. He has the patience to know what to buy and when to buy it. He does not follow the trends, and he does not go into a frenzy when the market shoots up or down. He is as steady as a rock with his investment decisions. We can’t all be like him, but we need to know when to control our urges to jump into an investment fad that may fade quicker than we expected.

The money is yours to do whatever you want with it, but most sound financial advisors will teach to invest in mutual funds for the long-term. There are hundreds of quality funds with proven track records of consistently high returns with low brokerage fees. If you have some money to play with, then go ahead and put together a portfolio of single stocks, but remember to calculate the risks you are willing to take before jumping into it.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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