If you've ever watched CNBC, you know that they hire talking heads who love talking about individual stocks and whether you should buy or sell them on any given day. I've never owned an individual stock, and I don't see that changing anytime soon. Here's why:
Properly Investing in Stocks Requires Time
Stocks are a great investment to grow your wealth. Unfortunately, owning individual stocks requires spending a significant amount of time researching companies. While you could just blindly follow the advice dished out on TV, you wouldn't be getting the full story. Those experts pick and choose what they want to talk about, and their advice may leave you with more questions than answers.
An average investor has no clue how to read and analyze financial statements. But you need to understand all of these documents so that you can decide whether the stock is properly valued today, whether you think the stock will be worth more in the future, or whether you should sell it and buy a different company.
You Need to Diversify
To make things even more complicated, you shouldn't put all of your money into one stock. If something awful happens — like a giant oil spill — then the stock could plummet, and you could lose a significant amount of the money.
At the very least, you should probably own stock in five to 10 different companies to be properly diversified. Some say that number should be even higher. Imagine the time you’ll have to spend on tracking and researching all of them.
Not Every Stock You Investigate Will Be a Winner
When you're first getting started in the stock market, you don't own any stocks. You have to find companies to consider investing in, and then perform the aforementioned massive amount of research.
Sadly, not every stock you investigate will be worth buying. This means that many of the hours you spent researching a company will result in a smart decision to not invest in a stock. However, your next step involves spending even more time researching other companies to find a stock that you should invest in.
You Need to Continue Doing Research
Once you buy a stock, you need to continue investigating it on a regular basis to make sure that its value is safe. Multiply the effort times the number of stocks you own, and you can see how owning individual stocks can become a very time-consuming task.
If you slack off on monitoring your stocks, you could miss a major news event for a company you own stock in and lose a significant portion of your investment.
Others Will Always Know More Than You
Even if you spend countless hours researching stocks, there will always be others that know more than you. Investment firms hire analysts to monitor just one part of one stock. These analysts spend 40-plus hours per week doing the kind of research that you could never dream of doing yourself.
Sometimes these massive companies don't even earn a higher return than the broad stock market. If that's not scary, I don't know what is.
Investing in Individual Stocks Takes Real Work
As you can probably guess, I don't plan on personally investing in individual stocks. It just takes way too much time and effort. Instead, I invest in diversified index funds. These are a kind of mutual fund that mimic a particular stock index, such as the Standard & Poor’s 500 index. The index fund owns the same stocks that are in the S&P 500, and if the S&P 500 goes up by one percent, the index fund should go up one percent, as well. They normally have very low costs, which helps me keep more of the money that I earn in returns.
I won't ever hit a home run with a stock by investing in index funds, but returns that closely match the market over a long period of time work just fine for me. In fact, over the last few years, my index funds have very closely matched the returns of the indexes they aim to match.
I've earned a little over seven percent annual returns over the last five years, which isn't bad at all. I could spend countless hours trying to earn an extra couple percent in returns on my investments every year, but I can't compete with investment firms that have resources greatly outnumbering my own.
To top it off, I don't have to spend my time reading boring financial statements. I can live with that.