Why stock picking isn't for you

Why stock picking isn’t for you

By Bruce Sellery on June 8, 2012
Estimated reading time: 4 minutes

Do you think you're ready to make a big splash on the market? Bruce Sellery gives his recommendation on the stock market.

Question

I am new to investing and would like your thoughts on the best stocks to buy right now. I’ve been paying off my credit-card debt and I feel like I’m ready to get into the market in a big way.

Answer

Whoa, Nellie. Stop right there. There are more red flags in your question than at the Canadian F1 Grand Prix in Montreal. You are not ready to get into the market, and certainly not in a big way. You definitely don’t need stock recommendations. In fact, you shouldn’t be investing in stocks right now—and maybe ever.

Why stock picking isn’t for you

There are a few reasons why I am so vehemently against you getting into stocks.

Credit-card debt: You have high interest debt and that needs to be taken care of first. You’re on the right track by paying down your credit-card debt; don’t loose your focus now. Eliminating credit-card debt is a guaranteed return on your money. Depending on the card, it could be worth 20% versus an uncertain return on a stock in a volatile market.
Taking a gamble: You say that you want to get into the market in a “big way,” but that’s a terrible way to learn how investing works. It is analogous to pulling up a chair at the high roller’s table in Las Vegas and plunking down a huge stack of chips. You’d be wiser to play a low stakes game with your buddies in the basement and learn how the game works first.
Pundit recommendations: You’re asking me for stock recommendations? I can give you recommendations on the best hikes in Italy, raising a toddler, and how to get a handle on your money so you can live the life you want. But I can’t provide you with stock tips. It just isn’t that simple. In order to get good at the game you need to do your own research and develop your own ideas. Making money in the market requires you to know what to buy and what to sell. There are lots of people willing to tell you when to buy, but those pundits rarely tell you when it’s time to sell.

Figure out your priorities

Take a look at the Priority Pyramid for my method on how to figure out what to focus on when it comes to getting a handle on your money. But understand that even once you get to the highest level of the pyramid—optimizing returns—it probably doesn’t make sense for you to trade individual stocks. The simple reason is that it is very hard to win at that game.

Exceptions to the no stock rule

There are three exceptions to my ‘don’t buy individual stocks’ rule.

Professional with a track record: There are plenty of good advisers out there who will help you build and maintain a portfolio of individual stocks—for a fee. You need to look at their track record to be confident that, at least in the past, they have been able to at least meet the performance of the benchmark index over time.
Employer stock plans: Some companies will pay their staff a portion of their compensation in stock—and that is often a great investment. However, be sure to watch your diversification over time and don’t get so enamored with your employer’s prospects that you don’t know when to reduce your position. There are plenty of former Nortel Networks employees who wish they had taken profits when they could.
Having some fun: If you want to play around with individual stocks for the thrill of the game, that’s fine. But do so in a little way. Take 5% of your assets, set up a discount brokerage account and have fun with it—just don’t risk your whole portfolio.

I hope you don’t think I’m being rude for not answering your question. But I highly recommend that you ask a different question: What is the No. 1 thing I need to do to get a handle on my money? Playing with stocks is definitely not the answer.