Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund or ETF.
One of my favourite topics: Diversification!
Back to basics: If you aren’t clear on what a stock is or what a mutual fund is, read this first: What is a stock? What is a mutual fund?
Onwards! If you love all things Apple: iPhones, iPads, your MacBook Air, you would probably be tempted to buy stock in Apple, which you could easily do buy purchasing AAPL-Q in your stock trading account. (which at yesterday’s closing price of $130.56, would cost you $13,056 USD + commission which at Questrade would be $4.95).
But what if your entire life savings amounted to $13,060? That you had either been saving for several years, or you had just received your first ever annual bonus (Yay!), and the grand sum of $13,060 was the exact amount of cash in your investment account. What then?
Because what if in June of 2015, 84% of the free world decides that Samsung is the superior phone (not you, and not me, but you know 84% of other people..). What if there is a huge strike in China, and Apple products can’t ship for a few months, causing the company to lose billions of dollars (and giving customers a chance to try other products, like Sony, Dell, Microsoft Surface). What if extra-smart scientists discover that the one of the rare and precious metals used in iPhones is the cause of Alzheimer’s? What are you going to do, and how are you going to feel when you read that (or anything similar) on the front page of the Wall Street Journal?
Because that shit happens. All the time. Only we don’t think much of it when it’s just news. Because we can glance at the article, shrug our shoulders, and go back to our Starbucks (SBUX-Q $50.61 , #justsayin’) latte.
I will tell you that regret (and it’s healthier cousin, grief) are not something that I would ever want for you.
And I can tell you how you are going to feel if three months earlier you had bought $13,060 of APPL-Q at $130.56, and now at $58.35, your life’s savings is (overnight) worth: $5,835.00. Did I tell you that this shit happens all the time? I know because it has happened to me. More than once. One day (soon) I will tell you those stories, but for today, I will tell you that regret (and it’s healthier cousin, grief) are not something that I would ever want for you. That life throws enough curve balls at us to experience enough regret and grief for a – yah, lifetime – without creating our own misery by putting everything we have into a single stock.
..and thankfully, we don’t have to!
A stock mutual fund, or a stock ETF, is comprised of many, many (sometimes 30, sometimes 10,000) stocks so that if (THIS IS VERY IMPORTANT) a company experiences something very, very bad (or even a little bit bad), the negative effect on your entire life savings is not mind-blowingly awful.
And so (you ask) is not the opposite true? That when something incredibly good happens to your company/stock, is not the incredible meteoric rise in price doesn’t have a huge effect on the total worth of your account.
Yes, and this is the crux of investing. The investors’ dilemma. How much risk for how much reward?
Yes, and this is the crux of investing. The investors’ dilemma. How much risk for how much reward? We will talk a lot more (like, a ton more) about this, but for now we have enough information to answer our question: Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.
And I hope that I have demonstrated to you that buying a single company’s stock is (by far!) not safer than buying stock mutual fund (or ETF). The answer is false.
Cool? Ask Nanci if you have any questions on this or anything else!