Pick individual company stock?

The technology stocks are down around 30% from the peak of last December. Many pros suggested not to buy the whole Nasdaq 100 index but pick individual tech stocks with steady cash flow and healthy profits.

Picking specific companies has its own perils and is very labor-intensive. It is suitable for those who consider research and analysis on individual company stock as their passion rather than a painful chore. Majority of people would rather do something else. Life is short to spend on the things one doesn’t enjoy.  

Moreover, it can really catch you by surprise. All these scandals and “creative” accounting stories are countless. It is much easier to be manipulated if it is a relatively small company. One recent case in point is Viacom CBS.  Bill Hwang, an industry veteran, built an enormous position of $20B, on this company stealthily via heavy leverage from various big Wall Street banks. This is not supposed to be, but he found a loophole not to disclose it. When Viacom’s stock price declined due to certain reason, the banks demanded payment from Hwang. He can’t pay up so the shares of ViacomCBS had to be sold to make up the payment. ViacomCBS saw its share price halved in a week. We retail investors were blinded by this. It is good idea to keep it simple and stay away form complexity which harbors risks.

Buying sector ETF might be an alternative since their performance is more predictable based on economic cycle. For example, energy would do well during economic expansion. Financial would benefit from increased interest rate. It still requires some knowledge and experience, but it is much more manageable than picking individual stocks.

If you don’t even want to do that, another alternative is to buy the whole S&P 500 index ETF. Canadian might think they can just buy the Canadian index ETF. Please be aware that the Canadian economy make up is quite different from the US. It is less diversified with very high concentrations on energy and finance.

Some people really have concerns on climate change, so they might want to stay away from energy. Then, you might have to buy sector ETF to exclude energy. Fortunately, the energy industry only counts less than 5% in S&P 500 index.

Simple and long-term investing is much safer than day trading with complicated financial instruments like derivatives or short selling.

Published by Worthfy

Financial literacy and counselling

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