No one buys bonds for fun…
Photo by Austin Distel on Unsplash
So you have some extra money and you’re trying to figure out what to do with it? You don’t want it to sit in cash and you want it to be growing a little better and thinking about buying a few stocks for fun. No one buys bonds for fun. There is something about picking a company before the stock price has gone up that provides joy or excitement. The feeling is almost akin to gambling. However, gambling has a negative expectation while stocks have a positive expectation (overall and over a long enough time frame). The first thing to keep in mind is that, like gambling, there are many risks and if you don’t feel comfortable with those risks, you’re probably better off not doing it at all.
This needs to be money that you don’t need for a specific goal. This should not be for your kid’s education, a down payment on a house, or retirement. It’s ok if this is the difference between flying first class or coach while traveling in retirement, but it should not be the difference between retiring at 62 or 67. This is so important I’m going to say it again. Don’t put your lifestyle at risk. If this money is for a future goal, you should use a passive asset allocation strategy or hire a professional money manager.
Now, when you’re looking at stocks, keep in mind these are fractional percentages of ownership. The company is working to generate a profit and distribute that profit to the owners. This is usually in the form of a dividend, but a stock can appreciate based on the projection that it will have more profits to distribute in the future. How does the company make money and how will it make money in the future? If a mature company’s financials stay exactly the same from one year to the next, the stock price would stay the same and you would collect the same dividend. (But lose a little value to inflation.) This is different than a currency or commodity, such as Bitcoin or gold. Those are designed to be a store of value and when you buy it, you are hoping someone in the future will buy it from you for more than you paid. Bitcoin and gold don’t generate any revenue or profits to distribute to owners.
Most likely, you are going to underperform a professional money manager. It is her day job to look at company financials and external factors that would affect the stock price, not a hobby she is spending a few hours a week on. That’s ok, you’re doing this for fun and she’s doing it like her livelihood depends on it.
Start to think about how a specific company makes money. Does it provide a great product or service? Do you know people who talk about this product unsolicited? Are they going to spend more of their own money to buy it again? Are there many other people who feel similarly? Are more people going to spend more money with this company in the future?
Your opportunity comes from concentration risk and randomness in the short term. Money managers are probably working with dozens or hundreds of stocks. By concentrating to only a few stocks, you could outperform or underperform a benchmark by quite a bit. Even then, the best money manager in the world cannot consistently predict markets in the short term. Over a long enough time frame, Warren Buffet’s talents start to show, but in the short term, hobbyists could outperform him.
However, this does not mean that you should start day trading. Taxes and commissions and fees matter when you are investing in stocks. The best way to manage these costs are to buy and hold for a long time. But then you are getting back to whether you are doing this for fun?
Finally, and possibly most importantly, consider your emotions. How will you feel if you buy a stock and then it goes down? How will you feel if you sell a stock and then it goes up? Can you design a decision making process that will allow you to have fun without causing stress or regret? Do you like the idea of picking a single company and following it in the news? Or will you worry to the point it is no longer enjoyable? There are other ways to see your extra money grow. Doing so in a way that makes your life less enjoyable is not worth it.
Overall, it may help to think of the opportunity cost of your likely underperformance as part of your entertainment and discretionary spending. You don’t take money from your life savings to the casino. But you can gamble responsibly with money that is part of your vacation budget.
You will likely have less money than if you had invested in a diversified portfolio and it’s up to you to determine if that loss of compounded net worth makes up for any pleasure you got from picking the stocks and watching the ups and downs along the way.
Aaron Agte, CFP®, founder of Graystone Advisor, is a fee-only Financial Planner located in Foster City, CA, serving clients virtually in the Bay Area and across the country. He specializes in helping couples with stock options, RSUs, and other equity compensation.
@AaronAgteCFP