Image of a cup of coffee on top of the business section of a newspaper
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.

 
Rate this content
There are 4 Comment(s)
Tags Finance
  1. gmorgan@bigsandybb.com gmorgan@bigsandybb.com on 30 Aug 2017 at 5:53 PM

    I agree with Col.Ostrom. An individual owning an individual stock portfolio is or can be very risky. There are few people who have the knowledge or patience to make it pay off. The view that a stock broken would be a little laughable. Unless you are dealing with someone who has an in depth knowledge and a lot of money. The only way you get this knowledge is by past experience which is usually gained at great expense to the individual. The other insights offered are very a very specific point of view which doesn't seem to incorporate most people.

    Add Reply

  2. wpres154@gmail.com wpres154@gmail.com on 02 Mar 2017 at 3:08 PM

    I believe that Lt. Col. Shane Ostrom limb has broken. His article addresses risk and specifically individual stock risk. As a CFP myself, if I had not offered clients individual stocks I could be held out for liable for not providing a Fiduciary duty and standard of care to the client. Individual stocks such as AAPL, XOM, CVX, PFE and many others can be purchased and provide a diversified portfolio. One such strategy can be explored here Http://www.dogsofthedow.com/dogyrs.htm This strategy advises trading 1 time per year hardly aggressive and hold up very well to mutual funds. He failed to address ETF universe which is an investment that trades like a stock but the index ETF's provide automatic diversity for much lower cost overall. His article is flawed if he is pinning risk to individual stocks. Every asset class has risk examples include bonds, which have interest, reinvestment, inflation, credit/default, and liquidity risks. Real Estate which has interest and market risk. If he is addressing risk where would he have put your money? His analogy of the single stock being the cupola of a house and therefore contains the most risk of a portfolio is dangerous at best and terrible advice at worst. He needs to review this article and if he is going to address risk as his subject then he needs to do a professional job and address it across all asset classes.

    Add Reply

  3. bonsaibrod@gmail.com bonsaibrod@gmail.com on 01 Mar 2017 at 5:32 PM

    I believe the article is a bit short-sided. I would start with not all mutual funds or ETFs are created equal. So go with index funds, a good mix of growth, value, international, small cap, large cap, etc, lower your investment costs, and ride that during your accumulation phase. Then your retire and you want to now either draw down your retirement accounts or have your retirement accounts, both taxable and non-taxable, provide you income - the primary purpose you accumulated the funds. One great way to do this is to have a portfolio of dividend paying stocks. Is there risk? Certainly. But good aristocratic dividend payers are generally reasonably safe - but certainly do not take any more watching than that mutual fund. And they can essentially provide the additional income needed to cover variable expenses - presumably one's fixed expenses have already been covered with fixed income sources.

    Add Reply

  4. Mark Hensen Mark Hensen on 16 Feb 2017 at 9:34 PM

    I agree completely about not having a 100% individual stock portfolio. One additional thought I would add is that since most of us like to "hit home-runs" and be "above average" in most areas of life, the best way to do that in the investing arena is to take a small portion (less than 5%) of what you're investing to consider "play money" and invest in individual stocks if you have the desire. It's unlikely that you'll beat the market over the long-term, but it satisfies a need that most of us have yet keeps the core/vast majority of your portfolio on-track.

    Add Reply