Common wisdom in the stock market today tells most investors to avoid individual stocks in favor of low-fee funds. However, there are plenty of examples of investors hitting the jackpot on a single stock investment or a handful of good picks. While single stocks are riskier than a diverse portfolio, they offer opportunities for a big payoff if your investment and timing are right.
The Single-Stock Debate
While the stock market has been a popular investment option for a very long time, the way people invest is changing. Over the last few years, single-stock investments have gone out of favor when compared to low-cost index funds, but many investors still stick with portfolios of individual stocks. Advocates for low-cost funds argue that investors are best off buying a broad portfolio of stocks that emulates the market as a whole. On the other hand, advocates for single stocks appreciate the granular control of each investment and the portfolio as a whole.
Examples of Single-Stock Investment Success
Remember that not every stock pick will work out in your favor. However, it is possible to make a really lucky guess that will pay off down the line. To show exactly how well some single-stock investments pay off, here’s a success story from an expert in the world of investing. Julie Rains, a blogger at Investing to Thrive, advocates investing in single stocks as part of a well-constructed portfolio. Julie invested $7,000 in California-based computer-graphics-chip manufacturer Nvidia. The stock became a tenbagger; its value increased 10 times to more than $95,000 after she purchased it, as NVDA achieved advancements in deep learning and software for the driverless car market.
Expect Offsetting Losses
Just because one investment was a breakout success does not mean that every investment will perform well. Consider the investors who struck it rich with a small investment in Bitcoin. While it’s not a single stock, Bitcoin investments have many of the same characteristics as investments in a single stock. An investor who put $100 into Bitcoin in 2010, when a single bitcoin could be bought for 10 cents, could realize tens of millions in gains if they held on to that investment until 2021. Massive gains are certainly outside of the norm. Furthermore, if you hold multiple stocks in your portfolio, some of them are bound to perform poorly, offsetting the gains you have made. It’s nearly impossible to pick all winners all the time.
What Are Your Chances?
If you start buying single stocks, what are the odds you will have the same success as Wang or Rains? The somewhat frustrating answer is that it depends. The future performance of single stocks is based on many factors, including the company’s financial performance and overall economic and market conditions. A change in interest rates or unemployment figures is often enough to send stocks into a tizzy, and earnings announcements can have a major impact in the short term as well. To get the best results, focus on a long-term investment strategy. If you focus your investments in companies with a strong financial foundation and a proven business model, they are very likely to go up over time. There is always a risk that their values will decline, but much more so with a short time horizon than with a longer one. There are no guarantees in the stock market, and single-stock investments are riskier than investing in a diverse portfolio. Still, sometimes, those single stocks work out great and offer amazing returns. When that happens, you’ve found the holy grail of the stock market.
