Why Your Stock Picking May Be a Detriment to Your Financial Plan

Why stock picking means nothing to your financial plan

Financial planning or stock picking?

As a financial advisor, I constantly hear the same two questions (if only I had a nickel…):

“What stock should I invest in?”

And,

“Can I tell you about the stock I just bought?”

There are no boundaries; this happens everywhere – at parties, at the bar, at the store, at dinner tables, and at networking events. People whip out their phones and share stock charts and tips that “made them so much money.” (Personally, I compare sharing winning stock picks to talking about a win at a casino. Most individuals just share the success stories – you don’t want to brag about the times you lost your shirt at the blackjack table. Where’s the fun in that?)

What I find most interesting is that there is never any discussion about profits, losses, and earnings of these “superstar” companies (some of the key factors that matter when picking investments).

I am not here to tell you whether your stock selection is a great idea or not; however, I will tell you that it is unlikely that a good pick or a bad pick will drastically change your financial future.

More importantly, if you are depending on “picking stocks” to meet your financial goals, then you may need to reconsider your “plan.” If you want a 44% chance of doubling your money, then go to Vegas; you don’t need a financial advisor.

Simple Math – Why Your Stock Doesn’t Matter

Success comes down to simple math as well as how much you are willing to invest. More often than not, when investors pick a stock and invest, the total investment is a small portion of their assets (to be fair, it makes sense to only invest a small portion of your money in a stock for which you have no vested or controlling interest.  But I digress…)

Let’s assume that you take a hypothetical $10,000 and invest it in XYZ stock.  Continue the assumption and imagine that the value of XYZ stock doubles in one year (which would be a remarkable and uncommon event).

Great.  Your $10,000 turned into $20,000.

However, let me ask you the following questions. Will this dollar amount materially change your lifestyle?  Are you suddenly independently wealthy?  Can you quit your job and buy that Ferrari you’ve been dreaming about?

Cue the “Debbie Downer” music – the answer is almost certainly “no.”

Unless XYZ stock quadruples or sextuples (is that even possible?), you will typically not have enough invested in this one stock to see a huge, life-changing result. It’s simple math.

When Will You Sell?

For argument’s sake, let’s assume that you did pick a great investment, and it performed as well as the example above. Are you going to have the discipline to sell your beloved stock and make money? (You don’t make money until you sell…you know that, right?).

What if you don’t sell at the top of the market and XYZ stock starts to lose money?  At what point will you cut bait?  Worse, will you hang onto your baby in hopes that it will “bounce back.”

Maybe I’m wrong. Maybe you have the discipline to sell at the top of the market and cash in your stock.  If so, congratulations!  You picked a great stock and made a great profit.

And for the record, three very unlikely things happened in this imaginary stock scenario.

  1. You picked a stock.
  2. Your stock doubled and doubled.
  3. You sold your stock at the perfect time.

This is the question: can you do it all again? We already determined that this amount of money won’t materially change your life. So what now?

Time to reinvest.  Now, do you think you will be just as lucky, er… successful on your second time around? What about your third?

What’s My Point?

If you want to invest in a stock for fun (I chose the word fun intentionally), then, by all means, go ahead. If you do, I suggest you use “fun money” (money you don’t need) to do so.

(In this sense, fun money is a small amount of money that you can afford to lose.  I am not saying you want to lose it, but it won’t put you in the poorhouse if you lose it).

I encourage you not to fool yourself into thinking that random stock picks from your friend is a sound financial planning strategy that will help you to achieve your long-term goals. Accept it for what it is – typically, a 1- or 2-year spin on a financial roulette wheel.

If you want to save/invest money for retirement, a house, college, or something else, it takes time.  It also takes a plan.  It takes goal setting and discipline. It takes a concerted effort over a period of years to accumulate wealth (unless you win the lottery, obviously).

Don’t make the mistake of thinking that any one stock pick is going to change your life.

The above hypothetical example is for illustrative purposes only and does not attempt to predict actual results of any particular investment.  No person or system can predict the market.  All investments are subject to risk, including the risk of principal loss.

Image courtesy of cuteimage at FreeDigitalPhotos.net

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One Response to Why Your Stock Picking May Be a Detriment to Your Financial Plan

  1. Danial February 16, 2015 at 8:43 am #

    An interesting discussion is worth comment.
    I do believe that you should write more on this topic,
    it might not be a taboo matter but generally folks don’t speak about these topics.
    To the next! Cheers!!

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