Should individuals invest in stocks?

This is a tough question, the view from most market experts can be summarized into ‘Individual investors should use index rather than individual stocks’. However, in my personal opinion, individuals should invest in stocks too, of course there are many caveats. Why do I think so? What are the caveats? This article is a continuation of the series Individual stock picking vs. index/managed funds.

Without saying, individuals should first ensure that they have got their income and expenses properly allocated. A percentage of income should always be saved, and a portion of that should be invested into the market. The reason I believe that is because historically the markets have given one of the best returns on investment of any class. There is no reason why the majority class shouldn’t participate in this opportunity. Other benefits include: less expensive, interesting exercise to research companies, gives you control over when you sell, allows you to manage the tax consequences (tax-loss harvesting), gives more flexibility to your portfolio and be socially responsible.

First, it comes down to how much money a person has and how they want to put it to work. I am completely against rash risk taking but believe in pushing the envelope. Next, I believe in value and growth investing for individuals and not active managing of stock portfolio. Don’t try to time and beat the market, you will invariably loose. Investing with long-term perspective increases the probability of success dramatically. Index funds are good and should be part of the investment plan but common-sense direct stock investing as portion of investments is also good.

Diversification can be achieved by buying a number of different stocks of companies in different sectors. While this used to be a challenge earlier, with the tools, information and research available now (AlphaStreet is a great source) to folks, monitoring risk and diversifying is not a challenge anymore. Transaction costs used to be another main concern for individuals given that they would invest incrementally and in small amounts. Today’s investor has access to many brokerages that allow for easy diversification at low or no transaction costs. I feel that given access to so many avenues, individuals today can confidently invest a portion of their investments in stock portfolio.

Discipline and consistency will ensure that an individual can also partake in the gains rather than leave all to the wall street professionals. In the next parts of the series we will discuss diversification and how to achieve it.