Save Invest Give: Why Buy Individual Stocks?

I'm often asked why I buy individual stocks.? The tone of the question is usually that someone like me really ought to know better than to do a foolish thing like that.? Why not just buy mutual funds or exchange traded funds?

The arguments for funds are very strong and I understand that.? Most of the arguments are variations of two key points: (1) Most investors aren't likely to beat the indexes, and (2) the commissions and other fees are much less for?funds.

I'm not going to debate the first point in this article.? The second point, however, involves fairly straightforward mathematics.? The commission expenses of your portfolio are mainly a function of how often you trade, how diversified you want to be, and the size of your portfolio.

If you only have $1,000 to invest in equities, buying individual stocks does not make a lot of sense.? If you want to buy 10 different stocks so that you have at least some level of diversification, then you are going to buy a paltry $100 of each stock.? At $10 commission per trade, your entry commissions would eat?up 10% of your money.? Buying $1,000 of an index fund is clearly more appropriate in this case.

Similarly, if you want to own hundreds and hundreds of stocks, it's unlikely the size of your portfolio will be large enough to support the commissions for all those stocks at a reasonable cost.? Also, if you like to market time most or all of your portfolio, you will not want to to have to place dozens of buy or sell orders and incur dozens of transaction commissions when you want to "get in" or "get out".? This is why short term traders love exchange traded funds and index futures.

However, there is a particular type of portfolio that is the sweet spot for individual stocks.? They can be very cost effective when you have a reasonably?large portfolio in dollar terms, you only want to buy 20 or 40 stocks, and you don't trade often.? For example, the value of my dividend portfolio is getting close to $700K.? I hold about 25 to 30 different stocks, and only make about a half dozen trades per year.? The commission costs on such a portfolio is about 0.01%.? This is actually cheaper than index funds, and much, much cheaper than actively managed funds.?

Source: http://www.saveinvestgive.com/2012/08/why-buy-individual-stocks.html

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