Why Owning Individual Stocks Doesn’t Work

Take Amazon, for example. Investing $10,000 solely in Amazon back in 1997 would have netted an investor $11.5 million today. And these examples are abundant: Netflix, Apple, Alphabet, you name it. 

But the logic is flawed.

It’s easy to look back and believe we’d know what stock to pick. But when the New York Stock Exchange (NYSE) alone lists around 2,300 individual stocks…that’s a lot to choose from. 

The research: Why it’s not very effective

A study on Wealth Creation in the United States from 1926-2019 released in 2021 revealed that most stocks actually reduced stockholder wealth. That’s because most stocks aren’t profitable. Less than one-third of 1% accounted for half of wealth creation. And a 2024 study from the same experts only reiterated the problem: Individual stocks are more likely to destroy value. 

At the same time, we see more Americans owning individual stocks than ever. Approximately 21% of Americans own stocks—the highest level of ownership since the 2000s. 

The allure of gargantuan returns and the ease of purchasing individual stocks via apps and online brokerages undoubtedly contributed to this stark increase. 

Unfortunately, it’s often as good as gambling.

Individual stocks don’t work for a variety of reasons. 

First off, individual stocks aren’t very diverse. This means they are more exposed to market risk—nothing can soften the blow of a market downturn. If that stock fails, it fails. And you won’t get the principal back. 

But what if you invest in 100 stocks? Then your chances are a little bit better, especially if you’ve diversified by sector and stock type. But at that point, you would have had to research 100 stocks to determine their risk and how each stock weighs against the other for a balanced portfolio. Why not buy an ETF instead?

The less money you have, the more challenging it is to diversify your portfolio with only individual stocks. After all, you may be spending $18 per share per stock. Compare that to spending $18 per ETF, which is already diversified. 

A significant amount of risk is involved, which can trigger emotional decision-making. Unfortunately, emotions when investing tend to get us into more trouble — we buy when we should sell, and vice versa. It’s easy to try to buy and forget to offset the emotional stress. However, managing your portfolio with individual stocks is more important than ever, as their values can change rapidly. 

Alternatives to owning stock

Study after study, from the NYSE to the Hong Kong Stock Exchange, It’s clear that a diversified portfolio is more efficient and provides more stable returns than individual stocks.

There are various alternatives out there, although ETFs and mutual funds tend to be the easiest for most investors. Both investment options can be bought on brokerages or through a fiduciary advisor. They are already diversified. For example, a Vanguard Total Stock Market ETF includes over 3,500 stocks—so if 50% tanks, the 50% that performs well may offset losses. 

Similarly, mutual funds offer a wide range of diversification. Managed funds, such as those managed by GMO or PIMCO, may offer lower expense ratios or higher returns (or both). However, these offerings are typically offered only via a fiduciary investor, as they require high minimum deposits—often as high as $30 million. 

Depending on your situation, there are additional ways to support your portfolio. Fixed income, such as bonds or CDs, were extremely popular during the interest rate hikes. Investors can also supplement their main investing strategies with real estate, commodities, and alternative investments. 

The healthy investor mindset for selecting strategies that work

If you’ve been with the blog for a while, you probably know what’s about to come next. Your mindset matters.

There’s no stable strategy for rapid growth, and ideas like owning individual stocks appeal to that desire. Instead, most investors benefit from stepping back and using tried-and-tested strategies that work in the long term.

For example, one of the most well-known strategies is portfolio diversification, such as investing in different asset types and sectors. This approach, as mentioned earlier, limits your exposure to risk. 

Other strategies can include:

• Buying and holding for long periods of time (no day trading)
• Maintaining an investment plan to proactively set limits and distance from emotional decision-making
• Deciding whether to invest in a lump-sum or use dollar-cost averaging, which is investing at regular intervals
• Emphasizing value investing over high-growth investing for long-term stability, which is great for retirees and those with a low risk-tolerance

Maintaining a calm mindset and knowing your preferences will do more than bolster your portfolio health—it will give you peace of mind. 

The verdict on individual socks

Sure, you can still technically pick individual stocks. But that isn’t to say you can pick a winner. It’s just statistically unlikely. And, at the end of the day, would you rather base your investments on informed risks or a guess in the dark?

At Encompass Advisors, we’re a fiduciary firm. Not only do we give objective advice, but we can’t just give advice over the Internet, either. We need to see a full portfolio. And while investing in individual stocks doesn’t make sense for most portfolios, there are always exceptions.

If you are looking for a second opinion or need help reallocating your individual stock investments into diversified alternatives, we’re here to help. Book a call today, and we will get started aligning your portfolio with your financial goals. 

‍