Investing is one of those activities that makes one sound older and wiser. Why is that? Oftentimes, those who talk about investing are the ones who have done well at it. I think many people in their twenties miss the boat on investing at a young age and taking advantage of compound interest. Your dollars are like soldiers. By sending them out on the battlefield to bring home more troops, the goal is that eventually you will have an army that is self-sustaining and operating without too many of your own inputs.
If you’re reading this and beginning your investing journey, don’t find fault in your prior actions: you can’t change them. I think a lot of people get too fixated on sunk costs. There is a reason they are referred to as “sunk” costs; we can’t do anything about them. What you need to be focused on is the future.
One of the first questions people have when beginning their investing journey is whether they should focus on buying individual stocks or ETFs. Single stocks give you a share in a company, whereas ETFs (Exchange-Traded Funds) hold a variety of different assets such as stocks, commodities, or bonds and come in different forms. While both strategies have their own benefits, today I’d like to discuss some of the situations where investing in individual stocks may make sense for you.
You Want to Own Shares in a Company
This one is basic in concept, but that doesn’t mean it’s not important. Sometimes, you just want to own shares of a particular company. It could be as simple as you know the owner or you believe in the company’s mission. In today’s world, social justice has become an incredibly important component of the brands and companies people support. By investing in individual stocks, you are able to choose exactly the companies you want to invest in and participate in all the benefits that go with it.
While this may not to apply to everyone, having a certain percentage stake in a company gives you a level of control over the direction of it. For example, if you were the founder of a successful business that eventually went public, you might choose to take some of your payout and buy the stock of that company. This could give you control over board members, voting rights at the annual shareholder meetings, and other benefits. Not everyone is invested in a business because they want to make money. Sometimes owning something you believe in is the most important component.
You Want to Control Your Diversification
Diversification and stock trading used to be more difficult back in the day. You had to have either an individual or a service conduct the trade for you, and that usually came with a cost. Like most industries, technology has disrupted this traditional model and opened up individual stock investing to the masses. One of the best examples of this is the company Robinhood. Instead of charging individuals for each stock transaction, they allow a certain number of purchases for free per month and make money by investing any cash you have just sitting in your account.
One of the key benefits to this is that it allows your average trader to invest in a variety of different stocks. Let’s say you have a small portfolio and want to own a share of Microsoft, Tesla, and UPS. You can go ahead and do that for no additional fees. By utilizing a service like Robinhood, you can control your diversification strategy and buy the different stocks you want. This is one of the key benefits of investing in individual stocks.
You Want to go All In
While we just spent some time talking about diversification, I think it’s also important to point out the opposite. While putting all of your eggs in one basket isn’t usually advisable, as an adult in control of your own destiny, what you do with your money is up to you. Some people feel the need to put all of their resources against one particular stock or investment, and by buying individual stocks, you can pursue this strategy.
Why might people want to do this? Maybe they believe that something will happen that will benefit the company. Maybe they see an opportunity where the stock is undervalued. There could be a whole host of reasons why someone would do this. Just make sure you are acting within the scope of the law and doing what an outside person would think is reasonable. While I can’t give you advice in this area, I would always consult someone who is a professional to make sure you are not doing anything that may cause you trouble down the line.
While there are other reasons you may want to invest in individual stocks, I really wanted to hit home that the key benefit really centers around control and decision-making authority. By investing in individual stocks yourself, you are able to operate with autonomy and allocate your money as you see fit. I am looking forward to the additional perspective Eric can provide in this area.
There are cases where investing in individual stocks does make sense, but I have to say that I generally find them to be few and far between. But, to every general rule, there are exceptions, and Patrick does a great job outlining situations where it may make sense to buy individual stocks above.
When you think about Patrick’s thought around “You want to own shares in a company,” this can be for various reasons. The three that come to mind outside of what he has already outlined are:
- The Company’s Dividend
- The Company’s Stance(s) on Topic(s)
- The Company’s Brand(s)
While ETFs and Mutual Funds do return the dividends paid by the underlying securities to the owners, the retail investor has little to no control over the dividend return drivers within an ETF or Mutual Fund. For example, if you hold 10 shares of a S&P 500 Growth Mutual Fund and the fund currently pays a 3% dividend yield – the fund manager may decide to change the asset mix of the fund to companies that pay lower dividends, thus reducing the dividend yield of the entire mutual fund. In this example, perhaps the dividend yield is reduced to 1%. If you were counting on that 3% dividend, and the fund now yields only 1%, this has the potential to trip up your financial planning.
Patrick discusses social justice above, which is exactly what I am referring to as it relates to the company’s stance on a topic or topics. But beyond the mission of a company, you may choose to invest based on what a company does (or doesn’t do) beyond it’s mission. A few examples that I have discussed with others recently: female board representation, disclosures of lobbying practices, greenhouse gas emissions, and supply-chain sustainability. These four examples may or may not be captured in a company’s mission – but that doesn’t matter if you are investing based on these values.
Many studies have revealed that a company’s brands are uniquely tied with the company’s overall success. Measures of brand health, brand relevance, and brand equity can be closely tied to long-term (generally not short-term) performance. For this reason, investing in companies based on their brands often makes sense if you’re investing for the long-term. For the individual investor, there are two keys: 1. Don’t let your personal biases cloud your investment strategy, 2. Don’t focus only on consumer brands – B2B brands can be just as powerful, even if we don’t see commercials on TV as often.
There are a lot of reasons why you many choose to invest in individual stocks, but it is critical to ensure you are building your own diversification into your portfolio. Patrick does make the point about going all in above, and I completely agree with his caveat:
“While putting all of your eggs in one basket isn’t usually advisable, as an adult in control of your own destiny, what you do with your money is up to you.”
While I would never do this, in the end, it’s your money. If you’d like a second opinion, ask the employees at Enron who had 100% of their 401ks in the company stock.
(Side note: I don’t like the idea of over-investing in the company for which you work – but I plan to write a future post on that, so more later.)
As illustrated above, there are multiple reasons and situations in which it makes sense to buy individual stocks. These reasons can range from attempting to beat the market, to investing for social justice – but the goal is to stay true to both your investing principles and your personal finance plan.