Want to afford a Lambo? Just buy some penny stocks and make 100% per week! JUST KIDDING, PEOPLE – the classic advice is still the best: diversify and buy and hold for the long run. But what should you buy? Should you go all-in on Vanguard stock and bond ETFs and mutual funds, or should you put your money in individual stocks?
I think it’s a little bit of both. Or, rather, a lot of broad-based ETFs and mutual funds, sprinkled with a few individual stocks.
So why am I saying that? Why not just put all of your stock-buying money into the Vanguard Total Stock Market ETF (VTI) and similar holdings? Well, that’s not a bad idea. But if you want to add some spice to your investing life and maybe even make more dollars, consider individual stock investing. Here are some solid reasons for it.
Why You Should Be Buying Individual Stocks
Before I start, though, let me be clear again: buying individual stocks is risky and it should not make up the majority of your portfolio, unless you’re an experienced investor and know the risks.
An individual company can go bankrupt and you can lose your entire stake. A big ETF holding hundreds of companies will not do that. So, I only suggest buying individual stocks with a small part of your investment budget, unless you’re a sophisticated investor who is fully aware of the risks.
With that out of the way, let’s check out some great reasons to own individual stocks.
You Don’t Have to Own What You Don’t Like
I believe the age of oil is seeing the beginning of its end. So, I don’t like investing in oil exploration and extraction companies. However, when I buy an ETF like Vanguard High Dividend (VYM), I’m forced to own ExxonMobil and other companies I’d prefer not to own.
That’s not to say I hate ETFs – quite the contrary, they make up most of my portfolio. Still, one big advantage of having individual stock holdings is that you don’t have to buy companies you don’t believe in.
Buying Individual Stocks Let You Buy Your Favorite Companies
One of my favorite parts of investing is being able to buy pieces of companies that I like and believe in. Plus, I can also purchase shares of high-risk companies that I want to take a chance on.
Do you like buying clothes on TheRealReal? Or perhaps you love electric cars and believe the cities of the future will be full of charging stations from the likes of Blink Charging?
You can have a direct stake in these companies by buying individual stocks.
You Can Buy Individual Stocks With Your Custom Metrics and Criteria
ETFs and mutual funds force you to stick to the stock-picking criteria of the fund manager, whether it be active or passive. When you buy individual stocks, you can use your own.
Many of today’s most successful tech companies were once unprofitable, high-risk enterprises. If you have strong feelings about a particular company or industry (maybe you work in that industry or you’re an early adopter of technology), you can bet on it early, before the ETF crowd gets there.
Choose Your Own Investing Style
By buying individual stocks, you can be highly specific in terms of choosing a style. For example, you might want to create a portfolio consisting exclusively of companies involved in streaming video. It’s up to you – you have total control.
You Can Learn, Over Time, How Companies Do
With broad-based ETFs, you pretty much set it and forget it. Individual stocks, on the other hand, can motivate you to deeply learn about particular companies and how they do over time.
You can be as involved as you like – you can even go to the shareholder meetings, if that’s your jam!
Cut Losses or Take Profits on a Granular Basis
One big disadvantage of owning some ETFs is that one holding (or a few holdings) can have an outsized effect. For example, if you own DIA (which tracks the Dow Jones Industrial Average), almost 9% of your investment is in Apple. If Apple stock has a bad day, chances are DIA will, too, even if many of the other holdings do well.
On the contrary, if you held each of the stocks in DIA as individual investments using a commission-free broker, you’re free to manage it how you want. For example, if you don’t want to hold Apple or Goldman Sachs, you can do that. Or, if one of them has had a great run and you want to take profits, you can do that as well, without having to sell all of the holdings at once.
It’s Now Commission-Free with Many Brokers
In the past, it was costly and cumbersome to hold individual stocks because you had to pay a commission each time you bought or sold shares. Plus, you had to buy or sell whole shares.
Not anymore. Nowadays most brokers are commission-free, and many will let you invest in fractional shares. Indeed, since most ETFs and mutual funds have an expense ratio, it may actually be cheaper to hold individual stocks.
Reinvest Dividends However You Like
Many companies pay dividends on the regular. If you’re an ETF buyer only, then you have two choices: either buy more ETF shares, or take the cash out of your account. However, if you also buy stocks, you can take the dividends and use them to buy more of the company that issued them, or buy a different stock entirely. It’s up to you.
Summing Up Buying Individual Stocks
This is not for everyone, and you can invest successfully without it, limiting your investments to broad-based ETFs and mutual funds. And that’s a good choice. But if you actually like investing and want to have more control, it’s a great idea to dedicate a small part of your portfolio to individual stocks.
Buy what you want, buy what you love, and stay out of what you don’t. You’re in the driver’s seat when you buy stocks. You can even buy Ferrari (RACE)!
Do you buy individual stocks?
Tom @ Dividends Diversify says
Hi Miguel. I’m a big proponent of individual stocks for all the reasons you suggest. But, I like ETFs like VYM too. Especially in my IRA where I do not want one or two stocks to blow up my retirement account and therefore I look for greater diversification through ETFs. Tom
That’s the #1 reason I like to own individual stocks. You get voting rights for that company that you don’t via index funds.
And I thoroughly enjoy voting.