Investing can be quite complicated, especially for somebody with neither the ability nor the desire to learn about things like earnings ratios and free cash flow.
Mutual funds were created because there are millions of folks who will gladly hand over their funds to a professional manager. This money is gradually moving over to exchange traded funds because of excessively high mutual fund fees.
Most pundits suggest inexperienced investors should stick with ETFs. They offer advantages to investors like instant diversification, ease to buy, and low fees. Besides, these investors just don’t have the knowledge to graduate to picking a portfolio full of individual stocks.
But that doesn’t mean they should avoid individual stocks completely. Here are a couple situations where a small investment in an individual stock makes sense.
An easy one is at work. Many employers offer attractive discounts to workers who buy shares, discounts of at least 25%. Buying a stock at 25% off is a no-brainer, especially for someone who has a good knowledge of how the company works.
Another example is if an investor has a legitimate edge. I’m not talking about a hot stock tip from a friend, but rather a clear reason for knowing a company’s prospects could improve. One example could be a software developer investing in a software company. Someone in the industry can do a better job analyzing the future of a such a company better than a layman.
Because they just don’t have the ability to properly analyze these investments, inexperienced investors should still keep ETFs as a core part of their portfolio, with only a small percentage dedicated to unique opportunities.
