Gaby Deimeke
- I was tempted to buy in during the GameStop frenzy, but a friend’s sage advice helped me resist.
- A successful investor herself, she told me that buying individual stocks is a bad call in most cases.
- Instead, she recommends buying index funds, mutual funds, and ETFs for a diversified portfolio.
- Consult with an advisor to make sure you are doing everything to grow your wealth in this challenging time »
When I first decided I was going to take money out of my savings account and put it in the stock market, I made a rookie mistake and invested in companies I adored. I didn’t do my research on the stock price, the company’s earnings or debt, or whether analysts thought it was a good time to buy. I just bought a bunch of stocks and patted myself on the back until I realized that wasn’t such a good decision. Even though I’d invested in companies I loved, I ended up losing money because the stock prices kept going lower and lower.
In an effort to stop making more rookie mistakes like that, I turned to a good friend who’d made quite a bit of money investing in the market over the past 10 years. The advice she gave me was to resist the temptation to invest in individual stocks and instead invest in funds.
While at first I wasn’t sure I wanted to listen to this advice (hearing about stocks like GameStop that were climbing up to record highs during the pandemic made me tempted to buy in), I realized there are four main reasons she was right. And over the past year, following this advice has allowed me minimize my risk of losing money – and earn it instead.
Smart stock picking requires time, energy, and resources most investors don’t have
Investing in companies simply because I liked them was a mistake. But stock picking – i.e. investing in individual companies – is, in general, not recommended for everyday investors.
Not only is it risky (since you’re putting all your eggs in one basket) it’s also time consuming. If you’re considering investing in a single company, it’s important to do a deep dive into the company’s financials, analyzing things like the stock’s performance, earnings, and future growth or trends, which can take a lot of time and not be so easy for the typical investor. For most of us, investing in index funds or exchange-traded funds is a better strategy for building wealth while mitigating risk.
Owning single stocks is risky
When you decide to invest in individual stocks, you’re taking on more risk since the price of the stock can fluctuate a lot or even go to zero. It’s hard to predict what can happen in the future (the pandemic being proof of that) so if you put all your investment money into buying stock of one particular business, you’re more at risk of losing everything if the company goes under or the stock price drops.
Diversifying your portfolio reduces your risk
One way to minimize risk is to buy mutual funds, index funds, and/or ETFs because you’re investing in a group of companies. This is beneficial because, if the price of one stick dips significantly, the entire fund might not get too shaken up. This also allows you to refrain from putting your money into stock of just one company, or a handful, that might require you to keep a constant eye on the stock price, the news, the earnings reports, and more for those specific companies.
If a stock seems too good to be true, it probably is
If you’re just getting started as an investor, it can be easy to buy into the hype around individual stocks. I was able to avoid the temptation to buy in during the GameStop stock frenzy because I’d already made a rule for myself that I wouldn’t buy stocks based on trends, but many people who bought into GameStop at the wrong time lost money.
As a rookie investor, buying this stock just because the people around me were telling me to came with too much potential risk.
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