Financial Planning Fridays #84: Why We Don’t Recommend Individual Stocks

We wanted to share the top three reasons why we don’t recommend individual stocks at Presilium. 

First and most important: Your basic asset allocation, the mix you hold in stocks vs. bonds is the factor most responsible for your returns in the long-term. Which investments you choose and when you buy or sell them contributes a much smaller percent of your total return. We find that our clients are much better served having us focused on their financial, tax, and estate planning and their overall asset allocation- the areas where we can make a real difference rather than talking with them about individual stocks that may or may not outperform.

Second, many individual stocks significantly underperform the broader market indexes. JP Morgan Private Bank recently wrote a fantastic article on the risks of concentrated stock positions. They found that:

  • Two thirds of the stocks in the Russell 3000 underperformed the index from 1980-2000.
  • Furthermore, 40% of the stocks underperformed holding a simple cash position!

Third, we don’t think anyone can consistently outperform an index over any long period of time and the data backs this up. According to the most recent SPIVA report from S&P Global:

  • Ninety-one percent of professional stock managers underperformed their benchmark over the past 10 years and more than 93% underperformed over the past 20 years. These are extremely smart professionals who have dedicated their lives to buying and selling stocks. Even Warren Buffet, arguably the most successful investor of all time, when asked for investment advice has recommended using diversified funds based on indexes like the S&P 500 rather than choosing individual stocks.

We have been able to help hundreds of our clients reach their financial goals over the past 23 years without choosing individual stocks and by instead focusing on the areas where we can make a real difference.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.