Author: John Gerard Lewis, Gerard Wealth
Covestor model: Stable High Yield
It's a seldom heard and even more seldom heeded maxim: In general, people should not buy individual stocks.
Of course, you'd never know it today as an abiding investing principle, what with the paucity of personal finance acumen - exacerbated by frenetic financial TV shows. There rarely appears a story about, say, the more level-headed notion of mutual fund investing, unless it's to capitalize on the star power of an engagingly punctilious Jack Bogle, founder of the Vanguard Funds.
But even the master's index-funds-only mantra recedes into a charming anachronism once his interview ends and the trading types reappear with their yelping about this or that particular stock.
Oh, I know. It's good TV. It's sexy, exciting, fast. But for the non-professional watching from home, it falsely teaches that speculating is tantamount to proper investing.
Now, some readers may reply, "Well I don't speculate. I watch these shows to get ideas, and then I do my research." That's great for those individual investors who understand balance sheets, income statements, cash flow statements and their embedded metrics.
But those people are the exception to the rule, and you shouldn't fool yourself if you truly aren't in their number. And even if you're convinced that you are, no non-professional is capable of having professional-level analytical proficiency in every industry.
Speculating with other than "mad money" is simply irresponsible, though the TV producers know that issuing such caution deadens the arousal factor – and that's not good TV. But even a reasoned, judicious approach to buying individual stocks is ill-advised if it is not a disciplined, top-down strategy.
Proper personal investing begins with allocation of assets among stocks, fixed-income securities, real estate, commodities (commonly gold and/or silver) and cash. This allocation depends on a variety of personal factors, but especially within the allocation to stocks one rule should override all others: diversification.
Why? It's because of an insidious investing peril called specific-stock risk. It lurks beneath every company you buy, and you never know when it will rise up to bite you. That's why investors need to spread their risk by not investing too much in any single stock.