By Carolyn Walder
Buying individual stocks can be a thrill, especially if you are lucky and hit the jackpot with an Apple or a Google. However, it can also be gut-wrenching to watch the stock price shoot up and down. Furthermore, growth stocks generally do not provide a consistent means of drawing income (although high dividend stocks are less volatile and provide more income than most tech stocks). So you must be clear to yourself on why you bought a particular stock, i.e., what goal are you trying to meet by owning the stock in the first place!
If you bought Google or Amazon early—kudos to you! The hard part is knowing when to hang on (or even if you should) when the stock drops in price. Owning individual stocks, particularly stock in small tech companies, is very difficult because stockholders often second-guess their decisions about the company. Unless you have essentially what amounts to “insider knowledge” about the management and business plan, you don’t really know if the stock is dropping in price on its own merit or if it is just part of stock market volatility.
For this reason LWPM does not own or promote individual stocks. We do not know all that needs to be known to own stock in individual companies and hold enough of them to be diversified, particularly stocks for small companies. That is why we own DFA (Dimensional Fund Advisor) asset class funds. We do not have to pick the right stocks because we own a large basket of stocks. Some will be winners and some will be losers, but overall, we know that we will get the long-term return of the particular asset class. Putting all the asset classes together to create a diversified portfolio with a known long-term rate of return is what we do best and what we feel is the only way to manage money for specific objectives and goals (like providing supplemental retirement income).
So, if buying and trading individual stocks is your way of having “fun,” we say, “Go for it.” But if you have specific goals and objectives for the money that you have accumulated, we recommend a diversified portfolio of funds!