I post a disclaimer on every post that this site is not financial advice and I don’t recommend people simply copy my strategy. Buying individual stocks carries significant risk that most people aren’t cognizant off. 90% of investors have no business buying individual stocks. I often tell people that if they can’t withstand a 50% loss of the amount invested, then they have no business investing in stocks. 50% losses (or worse) are going to occur roughly once a decade and most people behaviorally can’t handle them. With that said, many people wonder if they should try buying individual stocks for themselves. My advice would be: for most people, absolutely not.
But . . . if you are insistent on buying individual stocks, I recommend that you first get your financial house in order and make sure that you have sound investing knowledge. There are some great personal financial blogs out there chronicling how to pull this off. Mr. Money Mustache is one of my favorites. Dave Ramsey gives great advice as well.
So, before you open a brokerage account and start buying individual stocks, I would say that the below items should be taken care of first:
- Get out of debt. Seriously, if you have debt, especially high interest rate credit card debt, your #1 priority in life right now should be getting out of it. You should treat it as if you are on fire and need to stop, drop and roll. Compound interest is a mesmerizing thing when it works in your favor as it does for stock investors. For credit card debtors, compound interest can ruin your life. As someone who made a number of stupid financial decisions in my 20’s, I speak from experience. The same goes for other kinds of debt: student loans, car payments, etc. Get that stuff paid off before you start even thinking of messing around with buying individual stocks. Start coupon clipping. Start cutting your expenses. Get a side hustle. Whatever you need to do, do it! Get out of debt as soon as possible! Life isn’t meant to be lived in chains.
- Set up an emergency fund. Stock market investing only works over long stretches of time. In other words, you have to lock the money up for years before you even think of using it. If you’re constantly withdrawing money from your brokerage account, then compound interest will never have a chance to work its magic. To be prepared for life’s hiccups and keep you from dipping into your brokerage account, you need to have a savings account covering at least 6 months worth of expenses set aside. Be prepared for life’s unexpected emergencies, otherwise you’re going to dip into your investments and no strategy will work.
- Buy a house. Rent is throwing your money away. For what you’re throwing away in rent, you could have a mortgage. With a mortgage, you build equity in a home and get tax deductions for the interest you pay. Homes really are a great investment over long stretches of time. Don’t buy dumb, ridiculously expensive homes that you can’t afford and don’t need. Don’t try to keep up with the Joneses. Do find a house with a mortgage payment that you can easily afford and is beneath your means.
- Invest in mutual/index funds. You should have money already invested in the stock market via your company 401(k) or set up in mutual funds. Vanguard has some great options. The IRA account I am tracking on this blog does not constitute my full net worth or investments. I invest in index funds and any stock investor should devote some of their equity investments to this approach.
- Read and learn about investing. An entire section of this website is devoted to books about value investing. You should read them all before you decide to buy an individual stock. If you refuse my advice and only read one book about investing, then my choice would be The Intelligent Investor in its entirety before you even think about opening a brokerage account.
- Develop your own philosophy about investing. Value investing isn’t for you? That’s fine! However, pick a philosophy. You must have an intellectual foundation. One of the worst mistake that investors make is shifting between philosophies of investing and chasing recent returns with no real commitment to one philosophy over another. This is a mistake because all styles go in and out of vogue at different times. After one style has a nice run, that’s probably the worst time to pile in. The key to winning in the market is finding a style that makes sense to you and sticking with it. Consistency is key. You’re not going to be able to stick with it unless you believe in it and it makes logical sense to you. There will be times when you are losing money and you will want to throw in the towel. You’ll be less likely to throw in the towel if you can look at your portfolio and remember why you made your decisions. If you believe in your philosophy, you can weather the storm. The mind is the true source of investment gains and folly. Figure out a philosophy that you can believe in and stay committed to it when times get tough.
A good example of consistency being critical is Peter Lynch’s Magellan Fund. Peter Lynch is one of the greatest money managers of all time. From 1977 to 1990, he achieved an astounding 29% rate of return for his investors. However, most investors lost money because they piled into the fund when it was hot and sold when it was cold. They had no patience and the lack of patience made them lose money even though they were in one of the greatest performing mutual funds of all time.
With that said, once your financial house is in order and you have a sound knowledge and philosophy about investing, then you can feel free to roll up your sleeves and attempt do-it-yourself investing in individual stocks.
Should you do what I’m doing? No.
Do your own homework and choose a style that you are comfortable with. Don’t just buy something because someone else is buying it. Think independently.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.