Buying individual stocks is not a smart way for individuals to invest. While the rewards may be potentially grand, the risks are far higher than most realize.
Investing always means taking some risk. Owning the entire global economy (also known as the global stock market) requires an investor to suffer losses at times, however, the risk of large, protracted losses is small and there is almost no chance of losing all of your money permanently.
Owning individual stocks is another story. You can lose all of your money, forever. Most don’t think it will happen to them, but many lost billions of dollars owning GM, Enron, most airlines, at one time or another, and countless other once popular stocks that suddenly failed.
Even if you don’t lose everything, owning individual stocks can lead to protracted losses (and we’re talking a lot more than the length of a typical bear market). Just ask anyone who purchased Microsoft at more than $50 per share back in 1999 or 2000 and has yet to see the stock return to that price.
Huge individual stock losses can even happen in overall good markets. Just last year, Best Buy shareholders had to suffer through a 41% one month loss in January. High flyer, Netflix dropped over 20% in March. In May, the value of trendy grocer Whole Foods fell 23%. Those who own former GE subsidiary, the insurance company Genworth lost almost 25% in July, recovered a bit over the next few months, and then watched the stock plummet 35% in November.
By comparison the biggest monthly decline in a globally diversified portfolio of stocks last year was a drop of less than 5% in the month of September. Overall, a global equity portfolio made just over 3% for the year.
Stocks are volatile, but individual stocks are extremely volatile and that makes them frightening. If you can’t handle being regularly scared and hate the idea of potetial permanent loss, you should never own individual stock,s no matter how good you think a particular company might be.