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Posted: 6:00 a.m. Thursday, Sept. 12, 2013

Individual stock picks vs. index funds

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By Clark Howard

ClarkHoward.com


I always get questions about the extremes of investing when I’m out and about. People are either asking me about a stock whose value has soared or collapsed…and they’re wondering if they should get in the game.

I am a Priceline junkie going back for years and years. People keep asking me if they should buy Priceline stock now. If you go back in time a few years ago, Priceline stock was around $20 or so a share. About 4 years ago, it was $50. Today it is around $1,000 a share.

Then people ask about Warren Buffett and Berkshire Hathaway, which sells for about $170,000 a share. Again, they ask me if they should buy.

I also get the other extreme:  “Hey, the stock of so and so company is down to 82 cents a share. Should I buy?’ I often hear that when an airline files for bankruptcy.

Here’s the thing. The share price of a stock – whether 82 cents or $170,000 – you never want to use either extreme as a decision maker. If you are buying individual stocks, buy based on fundamentals, not based on hot stock tips in a newsletter that you subscribe to. Apple is a classic example. People buy the stock because they love their iPhone and it’s an emotional decision.

I don’t buy independent stocks anymore because I don’t have time to research the companies thoroughly.

Remember that the goal should be financial security for your life. And you do that not by betting the farm on one company. If you are into picking individual stocks, you need to have a portfolio of about 30 stocks across industries. You need to research each of them, not buy on a whim or a hunch.

Ask the following questions when buying individual stocks: What are the profits? How does share price reflect those profits? What’s the historical growth? Where are they now in their growth? If a stock has been beaten up, is there reason to believe it will come back?

If you won’t do all that, it’s too hot of a kitchen to be in. Then I’d recommend you be dull like me and buy index funds, which are little slices and dices of hundreds or thousands of companies across the spectrum of capitalism. I want you betting on the future of capitalism, not the future of a single company.

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