Investing in individual stocks took on a new angle in 2021 with the advent of “meme stocks.” People on social media platforms built up hype around the stocks of specific companies and as a result, the share prices were significantly influenced. You probably saw stocks like GameStop and AMC mentioned in the news at the time. In some ways, this trend isn’t new at all. There are many investors who try to predict which sector of the market will perform best in the near future, and/or try to time their purchases and sales of funds to the market. Investors who buy individual stocks are often doing extensive research on the company’s financials, their leadership, and their competition.
When it comes to our investment philosophy at Starks, we aren’t chasing after the next flashy trend. Instead, we believe the best way to care for money you plan to use for retirement is to diversify and then buy and hold funds for the long-term. Putting a large portion of your assets in one stock is very risky, and you take on what we call “business risk.” Each publicly traded company has this risk – “any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt.”1 We try to reduce business risk by diversifying investments. A mutual fund or exchange traded fund buys shares of lots of different companies – often numbering in the hundreds. When your investments are spread out among so many companies, the risk that one might stop turning a profit or go under is still there but it’s effect on your portfolio would be much less. Meme stocks had an even higher risk level than normal business risk because their valuations skyrocketed well above what would be reasonable based on the company’s worth and expected earnings.
Buying and holding mutual funds that include different sectors of our economy, different size companies, and both domestic and international holdings are all ways to increase your exposure in the world of investing while reducing risk. We encourage our clients to hold these funds for long periods of time despite volatility in the stock market.
This is all advice we give to our clients for their money that is working towards achieving their financial goals. Funds that are designated for retirement savings, a child’s college, or even a large purchase in the medium-term, we advise investing according to this strategy. However, if you have a little extra money that you want to play with, this is where you could consider investing in an individual company or sector if that’s what interests you. Just remember to use what we call “fun money” for this purpose – money that you don’t need to meet your goals. Similar to gambling, since investing this way involves more risk, make sure to invest funds that aren’t crucial to your financial future.