How Should I Invest With Single Stocks?

When you start out investing, the mantra always seems to be that you should create a diversified portfolio. One of the easiest ways to achieve diversification is by investing in funds, which can spread your risk between a basket of different securities.

But what about individual stocks. Do they have a place in a diversified portfolio?

The answer is yes. But there’s more to it than that. We can’t talk about single stocks without talking about risk and volatility.

Let’s get started.

Since individual stocks tend to be more volatile than investing in funds–your money will ride on the fortunes of just one company. And it might be best if the money you put into individuals stocks is so-called play money, which is cash you don’t mind losing if markets fall, and the company’s share price tumbles along with it.

What are the pros and cons of investing in single stocks?

Owning single stocks has pros and cons, just like any other investment.

On the pro side, owning individual stocks could help some investors feel more in control. They know how much of that investment they’ve purchased, and they can monitor its progress over time.

This is in contrast to owning shares of a fund, which may contain hundreds of stocks. With a fund, the fund managers choose which stocks to include and how they’re weighted, meaning that it may hold more of one stock than another. For example, a tech-focused ETF may contain more Apple shares than Facebook. And that may not suit all investors.

Single stocks may also suit the temperament of investors who may feel strongly about a particular company and its products, and may want to be part of its growth story: Perhaps you like Tesla’s vision for electric cars, or Apple’s endless stream of innovative consumer electronics. You may want to buy their shares directly.

And for investors who don’t mind doing the research, single stocks could actually help with diversification.

What’s more, single stock investors can potentially cap their own losses a bit more directly than fund investors: Don’t like how a particular stock is performing? You can sell it if losses reach a threshold you’ve predetermined. For example, you might decide to sell an individual stock if it loses 10% of its value or more.

And for investors who don’t mind doing the research, single stocks could actually help with diversification.

With that in mind, single stocks could in some instances help tweak the performance of a portfolio. In a down year when other stocks are suffering, a solid year that lifts the stock price of a single promising company that’s beating the market could potentially improve the total performance of your holdings.

On the flip side, single stocks are inherently more risky. You’re placing all your bets on the management team and performance of just one business, as well as ongoing consumer demand for its product or service, which can vary over time.

A portfolio filled with single stocks would be considered very aggressive. Many investment advisors, including Stash, would recommend balancing out a portfolio with bonds and funds, appropriate to your risk profile.

Do your research

Remember, though, before you invest in single stocks, you should do your research and learn all about the company’s executive team, the consumer demand for its product or services, not to mention the company’s quarterly and annual performance.

One good place to check on any public listed company is the Securities and Exchange Commission (SEC). Listed companies are required to file their quarterly and annual reports with the SEC. These are public documents, which you can access here, and they are usually gold mines of information about the companies themselves.

You can also find company information in the investor section of most public company’s websites.

And just like any other investing, if you plan to buy single stocks, consider owning them for the long haul. You’re likely to smooth out any shorter-term losses that way.