Shiva Sachaphimukh from Farnam Tree gives his insight.

Unfortunately, there are no stock picks in this article for you. Instead, we are exploring whether holding stocks is appropriate for you. While investing in individual stocks can be an exciting adventure, it is not everyone’s cup of tea, and people often find this out too late. The advantages on offer are handsome returns and a chance to be part-owner in a company.  However, there are also numerous factors to consider before going all-in.

Make Sure You Can Handle Volatility

The inherent nature of stocks involves volatility, where values can soar to new heights one moment and plummet the next.  This can be due to reasons related to business performance (fundamentals), or external reasons such as changes in the macro environment and shifts in investor sentiment.

Even companies as large as Microsoft saw a 35 percent decline during 2022. Great companies endure such swings and holding them can be rewarding.  However, if the thought of your asset moving up and down in value keeps you awake at night, individual stocks might not align with your risk tolerance.

Risk tolerance is a personal trait that varies from investor to investor. Some individuals thrive on the adrenaline of high-risk, high-reward scenarios, while others prefer a more stable and predictable investment journey.

Understanding where you fall on this spectrum is a critical first step. If you can stick to your long-term goals and weather the occasional financial storms without succumbing to panic-induced decisions, this ride may be suitable for you.

Understand the Time Commitment

The time you need to spend keeping track and thinking about your portfolio also matters. Managing individual stocks demands a level of engagement that goes beyond casual interest in the financial markets.

Successful stock investing requires staying informed about your investments, monitoring market trends, and being prepared to decide about a stock you want to/or already own and how it aligns with your goals.

For those with busy schedules or a preference for a more hands-off approach, the time commitment of individual stocks may pose a challenge. Unlike other investment vehicles such as index funds or mutual funds, individual stock ownership places the onus on you.

If your lifestyle leans towards a more time-efficient approach or if monitoring your portfolio doesn’t sound fun, you will be best served avoiding purchasing individual stocks and/or working with an advisor to find out what works.

Knowledge and Diversification are Tools for Informed Decision Making

Beyond risk tolerance and time commitment, the foundation of successful stock investing rests on knowledge and diversification. Before diving into individual stocks, it’s crucial to equip yourself with a solid understanding of the companies you’re interested in.

This involves delving into their financial health, evaluating prospects, and analysing historical performance. The importance of diversification cannot be overstated. Placing all your financial eggs into one stock basket is akin to walking a tightrope without a safety net.

Ignore the Media and Own Index Funds

Investors can participate in the growth that equities offer without having to own individual stocks.  Purchasing index funds that track certain markets does not require as much monitoring on your part.

The financial media, broker research, and brokers are all induced to encourage you to buy and sell. This increases commissions which is detrimental to the long-term health of your portfolio and disturbs compounding.

Always be mindful of this when your broker gives you a call with the latest stock tip. Buying shares in a company is not for everyone. Just because someone bought the stock of company A and made a killing, does not mean that the same approach will work for you.

Always look at purchasing individual stocks as part of a greater whole that is your portfolio, and ask yourself, does it align with the goals you are looking to achieve?

Shiva Sachaphimukh is a Director and part of the investment team at Farnam Tree.  He is a licensed Investment Consultant with the Thai Securities and Exchange Commission (SEC).

Farnam Tree is a boutique investment and wealth management firm based in Bangkok.  The company is a licensed Investment Advisor under the Thai SEC and Ministry of Finance.