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About the Author

Ostrom retired from the Air Force in 2000 after serving in a variety of personnel, education and training, and executive officer assignments. His assignments included tours in North Dakota, Florida, Korea, Australia, and the Pentagon. His final assignment was on the Joint Staff, writing and championing legislation related to joint officer personnel management issues. He earned numerous decorations and awards over his Air Force career.

After Air Force retirement, Ostrom was a practicing investment advisor at a large investment firm and a bank. He specialized in working with clients developing, implementing, and managing investment plans and portfolios.

A native of San Antonio, he earned a Bachelor of Arts and Master of Arts and is a graduate of the Royal Australian Air Command and Staff College and the U.S. Air Command and Staff College.

Ostrom joined the MOAA staff in 2006. His responsibilities include researching and writing articles and answering member inquiries regarding military benefits, health care, survivor issues, and financial concerns. He also travels extensively to discuss these matters with servicemembers and retirees and their families.

An individual stock portfolio is not necessary for successful wealth building. For beginners and people struggling to build wealth, it imposes too much risk in their wealth building efforts.  

Financial success naturally involves risks. As stated by Benjamin Graham, investment management is about the management of the risk, not the management of the return. If you can’t identify and manage all the various forms of risk associated with individual stocks, there’s a great reason for not owning an individual stock portfolio. Per Warren Buffett, risk is a result of not knowing what you are doing.  

Before considering an individual stock portfolio consider whether there are less risky ways to accomplish the same objective. There are.  

Individual stocks do not work as short-term investments because stocks are unpredictable. Yet, behavior studies indicate most investors do not have the patience to hold stocks for extended periods. Individual stock investors tend to be traders. Trading leads to questionable stock selection, bad market timing, taxes and increased trading costs.  

Without using the averaging down strategy, your success rests squarely on the shoulders of your stock choices, diversification and timing. How confident are you in your individual stock selections? Research indicates individual stock investors’ returns lag market long-term returns. A better choice for most is averaging down in low-cost index funds.  

Diversification can decrease your risks. Example, a single mutual fund offers diversification by owning many stocks. Several mutual funds in various market sectors (national, international, emerging markets, bonds, etc.) provide greater diversification by not being tied to a single market. However…  

A single stock assumes all risks and one oversight puts your money in peril. There are abundant risks with each stock selection. How many different company stocks would you have to own to diversify out the unacceptable risks? Too many for most to afford.  

Consider the misses of mutual fund managers. They live and breathe stock research, have special access to information and have a staff of specialists to help. And most still don’t beat the free-flowing markets over time.  

Finally, humans are not hardwired to be good investors. Our psychology and behaviors sabotage our results. Owning individual stocks magnifies our worse traits. A plan and professional help can reduce the negative psychology and behaviors from your portfolio.  

Financial success is like building a house. It requires a plan. A solid foundation. Quality materials. A sound structure. You don’t add a cupola (individual stocks) until the fundamentals are solid. Individual stock portfolios are best left to people who have their financial house established.

This article was originally posted in February of 2017. It has been reviewed and updated for accuracy.

 
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