I love buying individual stocks. I am definitely a financial nerd and stock junkie. I love reading, writing about, and researching stocks to buy and sell. But, make no mistakes about it. I only us a very small percentage of my family’s nest egg to buy and sell stocks in my Scottrade Brokerage account. I like to call it my mad money, and it only accounts for about 2% of all my family’s investments. By far, my family’s retirement and long term savings is invested in actively traded mutual funds, index funds through my 401-k plan, money market funds, and other mutual funds in my wife’s brand new 403-b retirement plan.
Not A Professional. Despite formal education, I am not a professional money manager. I do not have the time needed to devote to studying an dreading about individual companies adequately. You need to do a lot of research and due diligence to be profitable trading individual stocks. To be successful, you need to read all the annual and quarterly reports of the companies you buy and sell, listen to their conference calls with analysts, and watch for almost every news article and story about them as well. Now, multiply that by every stock you own. See now why mutual funds and brokerages hire a slew of stock analysts? You do not have the time needed to dedicate your attention to understanding what drives these stock prices higher or lower. Two or three or 1-10% of a nest egg is about all the average (or slightly above average) investor can handle.
Play Money. Want to start investing in individual stocks? It is awesome! I’m not going to lie. You definitely should! It is a lot of fun, and one of the best ways to go for the “homerun”. But, you have to approach with caution. You should only invest a small amount of money, especially in the beginning, that you will not be devastated if you totally lose the money. Maybe that amount is as low as $100, and that’s okay. Everyone needs to swing for the fences in the portfolio every once in a while, and that is the risk you should take and consider when investing in individual stocks. Individual stocks are risky, but they offer the potential for a great reward.