by Erin Lowry
This process of moving your shares is known as an “in-kind transfer.” Let’s say you’ve bought three shares of Netflix through Trusty Investing (a fictional robo-advisor). Trusty Investing folds after a year and you switch over to using a different brokerage firm: Reliable. You haven’t lost your claim to those three shares of Netflix because you, not Trusty, are the owner of those shares. You’ll just need to transfer the shares to your new brokerage account at Reliable.
SIPC insurance is similar to the FDIC insurance you get from a bank. As of 2018, it protects consumers with coverage of up to $500,000 for all accounts you have at the same institution, with a maximum of $250,000 for cash. This protection is for if the financial institution you use to invest fails. This is not to be confused with what happens if your investments lose value. Which takes us to the no part of this answer.
The stock market goes up and down. There will be days when your investments lose money, so no, your money isn’t entirely protected. You may one day take a risk that doesn’t pay off in the short term or maybe at all. That’s why diversifying, rebalancing, and considering your time horizon are critical. You need to mitigate the fallout you’ll experience from the inevitable downturns, market corrections, and recessions.
CHECKLIST FOR GETTING STARTED
☐ Set your goal:
Why are you investing?
☐ Determine your risk tolerance:
How much risk are you willing to take with this money?
☐ Decide on your time horizon:
When do you want to use the money?
☐ Collect all your personal information:
Social Security or tax identification number, government-issued ID, bank account information, personal and financial information
☐ Decide what kind of account you’d like to open:
Retirement, saving for education costs, general savings
☐ Compare fees:
Are you getting value for the cost of the expense ratio and any other fees you’re paying? Or are you looking for the lowest-cost version of a fund?
☐ Pick a brokerage firm.
☐ Pick a type of investment.
Chapter 7
I Like Gambling—Isn’t That Like Individual Stock Picking?
“BUY WHAT YOU KNOW.” It’s super-cliché investing advice, but it’s an adage I took to heart when making my first stock pick.
As a long-term index fund investor myself, this book is part of the reason I decided I should at least try out individual stock picking. (We’re not talking day-trader-level stuff.) Instead of going for some of the low-hanging fruit of things I knew, like buying some shares of Netflix or Amazon, I went with an oddball choice.
My dad works in the lithium industry. As a seven-year-old, I could parrot fun facts about lithium being the lightest metal on the periodic table of elements and that it’s used in batteries and depression medication. I probably freaked out some grown-ups with that one, but come on, Nirvana had an entire song about lithium!
Anyway, lithium has been on something of a hot streak in the last decade, as evidenced by the rise of companies like Tesla and the interest in green energy. I even had an interesting experience doing PR for a company that built battery-storage facilities for storing renewable energy. Suffice it to say, for not working in the lithium industry, I had some familiarity with the product.
So, when deciding which stock to buy, I went with a lithium-related option. And let me tell you, it’s been quite the volatile ride.
I invested about $5,000 in the stock. Five grand is certainly not chump change, but it was also an amount of money I could stomach losing if everything went sideways. In three months, it had doubled in value. By six months, my $5,000 investment had risen to over $14,000. Man, was my first stock-picking rodeo going better than I could’ve imagined. Then it stopped its upward trajectory and began to backslide. The investment dropped from $14,000 to $7,000 in four months, but I was still up by over $2,000. Even though that’s still a nice chunk of change, it was painful to look at the graph and see how much it had fallen since its peak.
However, this stock choice was a buy-and-hold strategy for me, just like much of my index fund investing. So, what will ultimately happen remains to be seen.
PICKING INDIVIDUAL STOCKS . . . IF YOU MUST
It’s been mentioned a few times already in this book that individual stock picking should not be your primary means of investing. In fact, for many, it shouldn’t even be a contender. However, I’m not about to write an investing book for beginners without addressing it. So, here it is. I will give you information about how to pick individual stocks, but that by no means should indicate that I think it’s a wise financial move for the average rookie investor. Most seasoned investors don’t get down with day trading, and many don’t even dabble in individual stocks.
“I did day trading before, and it drove me insane,” says Ashley Fox, a financial education specialist. “I’m too busy to day-trade, so I’m a long-term investor. My favorite holding period is forever.”
But you may be convinced that, at some point, you’ll want to purchase some individual stocks. (I mean, I did, so who am I to chastise the choice?) Here’s what you should know.
The Most Important Consideration: Could You Withstand Losing It All?
We’ve been discussing diversification, risk tolerance, asset allocation, and goal setting ad nauseam throughout this book by this point. And you’ll just keep hearing about them, too, because they are critical parts of building an investing portfolio that will weather the ups and downs of the stock market. They are how you sustainably build wealth. Individual stock picking is deliberately not mentioned as one of the best ways for the average investor to build wealth because when you consider individual stock picking, you need to be prepared for one thing: could you withstand losing it all?
“[Stock picking] is an entire job,” says Colleen Jaconetti, CFP®, senior investment analyst for Vanguard Investment Strategy Group. “You have to know: Is it a strong company? What’s going on in the industry? What’s going on that could impact the product that people are putting out? How is the company managed? Unless you really have the time to do the analysis on the company and the industry, to know all the factors that impact that company, it’s very difficult to pick one company or another.”
Even though Jaconetti doesn’t recommend focusing on individual stock picking as a significant part of your portfolio, she certainly understands the appeal: “When my husband and I got married, he was in IT and wanted to invest in Cisco. So, we took a small amount of money and invested in Cisco because that was important to him. But, for the most part, that’s not part of our long-term investment portfolio. That is truly his ‘I’m passionate about this company, I love it, I’ve been reading about it for three years, and I really want to do this.’ Okay. But I certainly wouldn’t let him do that with our financial future.”
Even those who make stock picking their full-time jobs don’t always outperform the market index. In fact, they often don’t. A cat has been shown to be a better stock picker. Okay, so it didn’t use the scientific method—but a goofy contest run by the Observer back in 2012 pitted a cat named Orlando against a panel of professional traders1 (specifically, a wealth manager, a stock broker, and a fund manager) and students from a secondary school. Three teams (two human; the third, the feline) started out with £5,000 each to invest in five stocks from the FTSE All-Share Index. The humans picked stocks based on experience, knowledge, and, supposedly, skill, while the cat threw a toy mouse at a grid of numbers that corresponded to potential stock choices. Each quarter, all the teams could exchange any stocks from the index. By the end of the fourth quarter, Orlando increased his portfolio 4.2 percent, to £5,542.60
, compared to the team of trained professionals’ £5,176.60.
HOLD UP, IS INDIVIDUAL STOCK PICKING LIKE GAMBLING?
“People need to have the right attitude for investing,” says Dave Nugent, head of investments for Wealthsimple, “and not treat the stock market like the lottery or Vegas. They need to realize when they’re investing in the stock market, they’re actually investing in real companies that sell real products and provide real service to people. I think it’s easy to get caught up in the fast pace of the market.”
The stock market so often gets compared to gambling because neither one promises guaranteed returns. It’s not an apt comparison, though, even for individual stock picking, and it’s one that’s likely to make investors bristle a bit.
For one thing, being an investor means you own a piece of the company—no matter how small. Putting a $100 bet down at the blackjack table at the Venetian doesn’t mean you’ve purchased $100 worth of ownership in the Venetian.
Both require levels of risk analysis, but what happens when you win big in Vegas? You should cash out. Quit while you’re ahead. The house is supposed to always win, and the game is rigged against you. If you keep playing, then you’re going to lose your money.
Investing is pretty much the opposite. You’re supposed to take the long view and ride the ups and downs. On average, the market yields healthy returns for those who stay in. Granted, that advice is typically for a well-diversified portfolio and not exclusively for individual stock picking, but it can be true for individual stocks if you’re taking well-researched positions and have a buy-and-hold strategy as opposed to day trading.
Perhaps a big windfall from investing produces a similar euphoric high as one you’d get on the floor of a casino, but investing and gambling are not synonymous.
HOW IS STOCK PICKING DIFFERENT FROM OTHER TYPES OF INVESTING?
“If you think about investing in individual securities, it’s risky because you are investing in the success of one company or a handful of companies,” explains Maria Bruno, CFP®, a senior investment analyst for Vanguard Investment Strategy Group. “And what’s happening then, potentially, is that you are pivoting away from the general broad market. So, when you see the market movements, your individual portfolio might perform quite differently because you’re invested in one or two or a handful of securities. So just be really careful in terms of how much you own in individual securities.”
PUTTING YOUR TOE IN THE WATER WITH FRACTIONAL SHARES
Plenty of experts will caution you against buying individual stocks, but Avi Lele, founder and CEO of Stockpile, sees individual stocks as a way to get people in the investing game. Stockpile, an online investing service, is a way for investors to buy, sell, and even gift fractional shares of stocks.
For example, Sam wants to buy stock in Bamzon, except Bamzon is currently trading at $1,400 for a single share. He doesn’t have that kind of money, but he could purchase $100 worth of Bamzon, which would mean he’d own around 7 percent of a share. If Bamzon started to pay dividends to its investors, then Sam would receive 7 percent of a dividend.
Buying fractional shares isn’t particularly common because the stock market doesn’t trade in fractions. What Stockpile does as a brokerage is it buys the entire share and then holds the leftover fraction. When Sam placed his order for 7 percent of Bamzon, Stockpile purchased the entire share at $1,400. On the same day, Mary placed an order for 40 percent of Bamzon, Jake bought 30 percent, and Tony purchased 5 percent. After all those purchases, Stockpile held the remaining 18 percent of the share.
The value of individual stocks has a few angles, explains Avi Lele. “The first thing we find is that it’s the thing that gets you to get started. It’s hard to get excited about a nameless, faceless ETF or mutual fund. Whereas everyone has brand affinity, so the thing we find is that people come in through brand affinity. They basically say, ‘I didn’t know I could own Facebook stock. I know a lot about that company, or I’m a big user of Nike products, so let me buy some Nike stock.’ That’s the thing that makes the on-ramp really easy for people. They’ve got at least one thing they understand, which is the actual company that they’re investing in.
“But that doesn’t mean that now they should embark on a path of only buying individual stocks. It often makes a lot of sense to branch out into ETFs. If you can take an ETF and kind of bring out what specifically the ETF does, like supporting the troops or clean-and-green, then you can teach people along the way this is what’s in the ETF. This particular ETF has stocks that translate into defense contractors and other military-type companies, while this other ETF is solar and wind and companies like that. The same thing that tends to work for stocks also works really well for ETFs.
“Some people start off saying, ‘I just want to buy an S&P 500 ETF and just get that bedrock foundational investment in place, and then I can add to it with other things that I feel like would be good investments.’ Whereas other people on the other end of the spectrum start off with an individual stock and keep diversifying their individual stock portfolio. It’s another equally valid way to diversify. Either way, all the rules apply. Start early, diversify, do it regularly, and do it for the long haul.”
DECIDING WHICH STOCK TO PICK
So, you’ve decided it’s time to add some individual stocks to your portfolio. It could be because you see real value in a particular company or that you’re curious about the experience. Either way, here are some questions you should be able to answer when deciding which stock to pick.
How Much in Total Do You Want to Spend?
“Don’t put all your eggs in one basket,” says Vanguard’s Maria Bruno, CFP®. “It’s very natural for individuals to have the desire to hold some individual securities. While that may be fine, don’t let it be a large part of the portfolio. I sometimes say, ‘Have a little bucket of play money.’ And don’t let that impact your overall portfolio.”
Can You Afford to Buy Even One Share?
Before you make a decision about which company stock you want to buy based on knowing, using, and understanding the product—you should probably check its share price. There are plenty of companies with shares that cost hundreds or upward of a thousand dollars.
Are You Still Diversified in Your Picks?
You still need to be diversifying. Even if you decide to go all-in on buying individual stocks and not to include a mutual fund or ETF in your portfolio (100 percent advising that this not be your strategy), then you shouldn’t go all-in on one particular stock or even one sector.
Avi Lele understands the pressure of having all your money in one stock: “I finally had enough money and enough courage to go in and hope I didn’t screw it up. I bought fifty shares of Microsoft, and then I was just a little overextended. I was in one stock, and it was at least a company I understood. I remember the share price, it was like $98, so I was in with just under $5,000. I was sitting there sweating it out every day, thinking, ‘I hope it doesn’t go down.’”
Had he been more diversified, it could’ve helped reduce his panic.
Have You Researched the Company?
This shouldn’t be a “trust your gut” decision. You need to back up your feelings with at least a rudimentary analysis of the company.
Is it profitable?
A company’s corporate report can give you details on its finances. Companies often have to file this information with the SEC, so you may be able to find it on the company’s website or at SEC.gov.
Is it reputable?
You may not know what’s happening inside the company, but whistle-blowing has become increasingly common in recent years. Just searching the news usually lets you know about prior or current scandals.
What’s the history of returns?
Go to Morningstar and look up the stock you want to buy and check its chart to see the company’s growth.
Do You Understand What the Company Does?
It’s not imperative that you understand all the inner workings of the company, but you should at least be able to explain what it does. This strategy can prevent you from chasing the latest hot tip and ensure you’re investing in something you understand. Bitcoin is a great example of people dumping money into a commodity they may not have understood just because everyone else was doing it. Those who understood blockchain could make well-researched, calculated investments. Those that didn’t were simply throwing money into an investment.
Don’t Invest Based on What Everyone Else Is Doing
It’s easy to get caught up in the frenzy of a hot commodity. Try to avoid buying in when your friends, family, dentist, and the random person you started chatting with on the street all recommend one particular stock, because that means the price is going up! You don’t want to buy when the share price is high.
WHAT YOU NEED TO KNOW IN ORDER TO BUY A STOCK
The first time I opened up a brokerage account with the intention of buying a specific stock, I had to spend about thirty minutes looking up definitions before I could take a half-assed, semi-educated guess at how to place the order. I remember looking at all the options and thinking, “I don’t know! I just want to buy $5,000 worth of this stock! HOW HARD IS THAT TO DO?!”
