Don’t put all your eggs in one basket. It’s a colloquial saying we’ve heard many times, and it’s an important one when it comes to your investment strategy. We know diversification makes good sense and can help you reach your long-term goals. But occasionally, a certain stock will come along that can make you throw disciplined investment principles out the window. Sometimes, the allure of individual stocks is just too attractive to the average investor.
Purchasing Individual Stocks
When we work with clients, we build an investment strategy that fits specific needs. Our investment team implements rigorously researched investment strategies designed to help our clients acquire, grow and preserve their wealth.
We take time to understand our clients’ preferences, appetite for risk, goals and timeline, and we select and manage an investment allocation specifically tailored to meet their needs.
Our clients can confidently delegate the detailed day-to-day task of portfolio management (which includes securities selection, trading, performance monitoring and responding to changes in the markets and the economy) knowing that their investments are being looked after.
However, there are times when an individual stock has personal meaning or interest for our clients, the glamorous stocks if you will, and those stocks may not be included in the investment strategy currently working for them.
This could be due to:
- receiving a stock tip from a friend
- being loyal to a specific product they currently use or believe in
- GameStop, Reddit and other trendy/hyped up phenomenon
Sometimes these stocks are researched by the individual and sometimes they’re not.
Sometimes clients can do very well with specific stock picks, and sometimes they can do very poorly.
While we don’t typically recommend clients make individual stock picks with large portions of their portfolio, we understand that sometimes people have interests they can’t ignore and may choose to invest in individual stocks outside of their investment strategy.
When does investing become gambling?
Gambling can be defined as “taking risky action in the hope of a desired result.” While all investing has inherent risk, our goal is to understand your tolerance for risk and build a strategy with that level in mind. When you invest on your own, you may choose to make riskier choices than we would in your overall investment strategy and may even make high risk choices that don’t align with your personal appetite for risk.
Some rules for gambling in stocks of your choosing:
- Gambling is gambling: whether it’s investing or Black Jack, only bet what you can afford to lose. Typically, aim for less than 4% of one’s portfolio in any one individual stock and less than 10% of the total portfolio.
- If you’re not on track to meet your retirement objectives (your retirement projections show you have less than a 70 percent chance of a successful retirement), then you really can’t afford to lose.
- Keep the tax consequences in mind when liquidating investments in individual stocks. Be careful on wash sale rules if you are actively buying and selling the same securities.
- Never confuse luck with wisdom.
- Keep emotions out of investing/gambling.
- Don’t trust everything you read.
- Always remember rule number one.
Please consider these thoughts and we will be happy to talk with you about your options, at your request:
If you intend to purchase multiple stocks and actively trade, we should probably set up a separate account for you to be able to execute those trades on your own. We can still report on them for you, but we typically do not place ongoing trades for unmodeled accounts.
For some clients, we’ve set up a separate account (i.e. Joint Account, Rollover IRA, etc.) due to their request for more active trading outside of the process we use for our investment management. They can do this on their own outside of our management using something like Robinhood or a TD Ameritrade Retail Account but we prefer to have everything consolidated with access to our performance reporting by doing it through us. We can allow them the trading authorization through the TD Ameritrade Advisor Client website to place trades at their discretion. We typically recommend these clients maintain at least 5% in cash in the accounts for our ongoing investment management fees, which cover the consolidated performance reporting and our time spent servicing the accounts.
If you are only making periodic purchases of 1-3 positions, we can easily accommodate this request in an account already managed by Searcy Financial Services or Allos Investment Advisors. What we’ll need from you is the number of shares of a specific investment you’d like to purchase and in what account. If you don’t have adequate cash in the account to make the requested stock purchase, we will need to reallocate your account to create the cash so this could cause a delay in the timing of the requested purchase.
Please also keep in mind that there may be tax consequences as a result of liquidating positions to create cash to purchase a stock of your choosing.
We typically suggest that any one company not represent more than 4% of your portfolio. Therefore, if your portfolio is $500,000, you likely don’t want to be purchasing any more than $20,000 of one position.
If you are fortunate enough to see your position(s) dramatically increase in value, we would typically recommend that you scale back the position, taking some, if not all, of your original investment off the table. This way, you can preserve your original investment.
As a reminder, if and when you purchase the chosen position, we allocate your portfolio around it according to the risk posture detailed in your Investment Policy Statement (IPS). We will not liquidate the stock unless instructed by you to do so. Because your stock is not on our radar of positions we track and monitor for our clients, we won’t be sending you updates and/or notifications about news specific to the stock with recommendations to sell it or buy more.
If you ask us to liquidate a stock, we will invest the proceeds according to our preferred allocation and the risk posture dictated by your IPS, unless you let us know otherwise.
Think about another story we hear about often: the tortoise and the hare. Very rarely does someone make their fortune by purchasing an alluring stock position. As un-glamorous as it might be, building wealth is more often based on a series of choices: maintaining a well-diversified portfolio over a long timeframe and making contributions and managing expenses early and often. We’re here to help, whichever route you choose to take!
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on May 25, 2021 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.