What Are the Pros and Cons of Single Stocks in Your Portfolio?
Stocks, mutual funds, or exchange traded funds (ETFs):What is the best option when you want to invest in the stock market?Is it worth the time and risk to have single stocks in your portfolio, or should you instead select mutual funds or ETFs, which give you exposure to sectors you likewithout the risk of placing all your eggs in one basket?
While there are many factors to consider here—like the amount of time you have to dedicate to investing or your tax planning needs—there is one other theory in investing that comes into play. Modern portfolio theoryfocuses on maximizing your return without adding too much additional risk.
To summarize, modern portfolio theory says that there is a point at which you can combine different investments that minimize risk for the entire portfolio while getting maximum returns.
This occurs because when you combine assets, you are diversifying your unsystematic risk, or the risk related to one specific stock.You get this diversification because you buy stocks that have a low correlation to each other so that when one stock is up, others are down.
Key Takeaways
- Many factors go into considering the efficacy of holding single stocks in your portfolio—like the amount of time you have to dedicate to investing, your tax planning needs, and your experience as an investor.
- Pros for single stocks in portfolios include reduced fees, understanding the taxes owed and paid, and an ability to better know the companies you own.
- Cons include more difficulty diversifying your portfolio, a potential need for more time invested in your portfolio, and a greater responsibility to avoid emotional buying and selling as the market fluctuates.
Understanding the Pros and Cons of Single Stocks in Your Portfolio
When trying to get as much return as you can for the least amount of risk, your number one concern should be diversification. While having low fees and managing your own tax situation is good, it is better to have adequate diversification in your portfolio. If you don't have the funds to make this happen, an ETF or mutual fund is probably better for you—at least until you build up a solid base of stocks.
Pros of Holding Single Stocks
- When buying individual stocks, you see reduced fees. You no longer have to pay the fund company an annual management fee for investing your assets. Instead, you pay a fee when you buy the stock and one when you sell it. The rest of the time there are no additional costs. The longer you hold the stock, the lower your cost of ownership is. Since fees have a big impact on your return, this alone is a good reason to own individual stocks.
- You understand what you own when you pick out the stock. You have complete control of what you are invested in, and when you make that investment.
- It is easier to manage the taxes on your individual stocks. You are in charge of when you sell, so you control the timing of taking your gains or losses. When you invest in a mutual fund, the fund determines when to take the gains or losses and you are assigned your portion of gains. This is true even if you just bought into the fund at the end of the year.
Cons of Holding Single Stocks
- It is harder to achieve diversification. Depending on what study you are looking at, you must own between 20 and 100 stocks to achieve adequate diversification. Going back to portfolio theory, this means more risk with individual stocks unless you own quite a few stocks.
- Achieving this diversification is harder the less money you have. Especially when you start investing, you are subjecting yourself to more risk due to the lack of diversity.
- It requires more time from you to monitor your portfolio. You need to ensure that the companies you've invested in aren'thaving business problems that could wipe out your bet. You also need to monitor industry and economic trends. You're your own portfolio manager, so you must spend the time to ensure you're not holding a bad position.
- You must keep your emotions in check. It becomes easier to sell a loser or buy a hot-tip stock because you can instantly log in and make the trade in minutes. This can increase your fees for trading and can also lock in losses that would have been avoidable by holding something a bitlonger.
FAQs
Unless you purchase fractional shares, you could be looking at high prices for a single stock. Sure, buying one or two stocks might not seem like much, but in order to achieve diversification and mitigate risk, you'll need to make multiple investments, which could quickly deplete your investing budget.
Should I have individual stocks in my portfolio? ›
If you have enough money to invest, are willing to accept the risk and want a high degree of involvement, individual stocks may be a good choice. Potential Growth of Principal – Stocks have a long track record of providing higher returns than bonds or cash-alternative investments.
What percentage of portfolio should be in single stocks? ›
There is no set definition for what makes a concentrated position. When an investment in a single stock represents more than 5% of a portfolio, T. Rowe Price advisors consider it to be worth addressing. Once a holding exceeds 10%, however, it represents a greater risk that requires more immediate planning.
Why not to invest in single stocks? ›
Cons of Holding Single Stocks
It is harder to achieve diversification. Depending on what study you are looking at, you must own between 20 and 100 stocks to achieve adequate diversification. 3 Going back to portfolio theory, this means more risk with individual stocks unless you own quite a few stocks.
Is it better to invest in one stock or multiple? ›
The whole purpose of holding multiple stocks in a portfolio is diversification. That means holding enough securities so that a big drop in one won't cause your entire portfolio to take a big hit.
What is the ideal number of stocks in a portfolio? ›
Most studies use the fully diversified portfolio as a benchmark and then derive that a portfolio of 20-30 stocks achieves a 'similar' risk profile as the target portfolio.
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
What is the ideal portfolio mix? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
What is the best portfolio balance by age? ›
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
One big downside to this, aside from the expense, is that it may make you think twice before selling a stock in order to avoid the transaction costs. You might end up holding onto an investment that's declining in value longer than you should be thus compounding your loss.
Is it better to buy S&P 500 or individual stocks? ›
Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.
What risk do you face when you buy a single stock? ›
If you invest all of your money into a single, expensive stock, you could lose a significant portion of your capital if that stock declines. By diversifying your portfolio, you can reduce your exposure to any stock's risk and minimise the volatility of your portfolio's returns.
How many stocks should you own in Warren Buffett? ›
This means that buying more than 12-20 stocks will not make your portfolio more immune from market volatility. Indeed, looking at portfolios of successful investors like Warren Buffett and other gurus, you see 8-15 stocks, which is the correct diversification.
What is a good stock portfolio? ›
A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Is it better to buy individual stocks or ETF? ›
ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much. The best ETFs have low expense ratios, the fund's cost as a percentage of your investment. The best may charge only a few dollars annually for every $10,000 invested.
Is 35 stocks too many for a portfolio? ›
Private investors with limited time may not want to have this many, but 25-35 stocks is a popular level for many successful investors (for example, Terry Smith) who run what are generally regarded as relatively high concentration portfolios. This bent towards a 30-odd stock portfolio has many proponents.
Do financial advisors pick individual stocks? ›
So, yes, most firms can advise on individual shareholdings. But most firms do not! There are probably a couple of reasons for this.
