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Why I Don't Recommend Individual Stocks Thumbnail

Why I Don't Recommend Individual Stocks

Investing

I get asked all the time, "why don't you recommend individual stocks as part of my portfolio?". The simple answer - TOO MUCH RISK! We have all heard the saying, "don't put all your eggs in one basket". Buying an individual stock is just that. Furthermore, the stock most people want to buy is the company they work for. So now you have your investments and paycheck in the same basket. Think about it, the "company" is doing poorly, stock is declining and you get laid off.

Oh, but that would never happen to my company. Ok, ever hear of Enron, World Com, etc. I could list others. Fast forward to today – how about Boeing (ticker symbol BA). All was good until it wasn't. On March 1, 2019 Boeing closed at $440.62 per share. Seemed like no end in sight for this stock. Then March 10, 2019 one of their planes crashed causing concerns about the design. The stock went down over $33 per share – over a 7% decline. As of this writing, the stock is now at $350 per share - $90 decline from the high of only 2 months ago.


Let's put this in to perspective. You have a $500,000 portfolio that you planned to withdraw 4% each year - $20,000. Say on March 1, 2019 your $500,000 retirement account looked like this:

  • $440,000 consisting of 1000 shares of Boeing
  • $60,000 in cash


Not bad – this plan could work. But wait what would it be today – May 20, 2019 – the portfolio is now worth $410,000

  • $350,000 the 1000 shares of Boeing stock
  • $60,000 in cash


Using the same 4% withdrawal formula – your annual income just went down to $16,400! I don't know of many retirees that could withstand an unplanned $400 per month decline in their monthly income.


Because of this inherent risk, I don't recommend buying individual securities as a significant part of an investment portfolio. Definitely not the portion of the portfolio you are planning on for income.