The new headlines pertaining to individual stocks dropping one day are probably the most eye-catching and innovative headlines there is today. Actually, it’s not far from happening. Those who are well knowledgeable and experience in the investment market each day surely noticed that when the data is run on them, the possibility of stocks dropping is not just an imagination. Let’s take a closer look to what Rob Isbitts, an investment strategist, portfolio manager and Senior Contributor of Forbes is seeing.
1. Investors are now encouraged to own, and perhaps consider individual stocks after the long stock market advance since the Financial Crisis low in 2009.
2. The mutual fund industry got hurt which has had steady assets outflows. This means compared in the past, paying someone to diversify your stock holdings for you is not really much of a priority.
3. Something new has burst on the scene and those are the ETFs. But the overwhelming emphasis of the advisors that utilize them is to simply “buy the market,” such that the largest names in the major stock indexes, principally the S&P 500 Index have steeped investment portfolios.
4. Due to the overall market tide that lifts most boats, a couple of bad eggs in one’s portfolio will not create much of an issue in an environment created by the stock bull market.
5. There is no way for the bull market to last forever and many investors currently do not appreciate the changes in the way individual stocks are battered all of a sudden following a perceived piece of bad news (earnings, product announcement, government intervention, etc.)
Essentially, the early signs of tomorrow’s big issues are being ignored because of the euphoria.
Isbitts have analyzed price changes such as dividends for all 30 stocks in the Dow Jones Industrial Average from the end of 2017 through March 11, 2019. The analysis ironically will not include Boeing’s stock because it had already been falling and even fell another 6% the next day. But it is, however, an important reminder of the points being made here.
Although we haven’t dug deeper in the 30 Dow stocks at this stage, assuming that when one looks outside the Dow at businesses that are on less solid ground, there is an even higher susceptibility to big daily declines in price.
At least 3.9% out of 125 times the Dow stock fell although there were many more in the 3.0%-3.9% range. But to better illustrate this issue, Isbitts use 4% as the cut off balance.
In the set of 30 esteemed established stocks that make up the Dow that works out to about 9 incidents per month. This means you would see a significant drop in one of your holdings if you are an owner of a 30-stock portfolio of that sort, 9 times a month. One important thing to keep in mind is that this is still a market in which stock prices are not constantly under attack. These are also the large, liquid stocks, not the ones aggressively use by investors to try to beat the market with.
According to Isbitts, even though individual stocks can play a central role in portfolios aiming for the long-term growth of capital, it may peak a while for their usefulness in other situations. Isbitts have cut way back in this portfolios the use of individual stocks for dividend income. He added that it wasn’t just worth the added risk when you lose a year’s worth of dividend in the stock price in a day. People don’t necessarily need to take Zantacs every time the earning season arrives. Instead, find other ways, which are by the way too many, to pursue that income and growth objective. Do not be fooled into thinking that there is another form of individual stock investing when there really isn't and think about what you really want to get out of your stock portfolio.
If you want to know more about the risks involved in stock ownership, you may consult an Accountant or a Financial Advisor who can give you a simpler explanation on what you will be facing. Do not rush into making decisions if you want to protect the money you’ve worked really hard for.
John Pournaras Agency