News & INSIGHTS

By Matthew Liebman

One question that frequently comes up in our conversations with clients and prospects is some variation of, “Why don’t you recommend individual stocks?” It’s a valid inquiry, especially for those familiar with our investment strategy, which often revolves around suggesting a diversified portfolio of funds, such as ETFs or other index-linked portfolios, as the core of a client’s investment portfolio.

We believe that avoiding an overconcentration in individual stocks makes a lot of sense for our clients, and we can categorize our reasons into three primary areas: prioritization, expertise, and friction.

Prioritization

When it comes to investment decisions, research from leading academics and industry experts consistently highlights the paramount importance of asset allocation. While discussing the allure of market timing and handpicking specific stocks might make for engaging cocktail party chatter, setting the right asset allocation is the linchpin of portfolio success. This practical perspective aligns with the academic findings.

Think of it this way: Even if Warren Buffett himself, arguably the greatest stock picker ever, were personally selecting your individual stocks, his impact on your overall financial well-being would be limited if you had allocated only a small portion of your portfolio to stocks. Similarly, picture yourself heading into the Global Financial Crisis with your entire portfolio invested in the stock market – any scenario would have resulted in substantial losses in 2008.

If we agree that asset allocation decisively outweighs security selection and market timing, then it’s only logical to focus our attention on the most critical aspects of investing and not let ourselves be sidetracked by less consequential elements.

Expertise

Choosing individual stocks demands a substantial amount of time, effort, and expertise. Multiple studies have demonstrated that even professional investors, whose primary occupation revolves around picking individual securities and outperforming market benchmarks, frequently fall short. As wealth advisors, our role is to be generalists, equipped to help clients achieve their financial objectives. We dedicate a significant portion of our time to designing portfolios and financial plans tailored to each client’s unique circumstances.

Moreover, our most vital task is managing our clients’ behavior to keep them on the path to their financial goals. One aspect of this behavior management involves steering clients away from forming overly emotional attachments to specific stocks whenever possible. To perform our job to the best of our ability, we cannot and should not allocate our time to selecting individual stocks. Given that even full-time stock pickers often struggle to consistently make successful security selections, we believe it would be imprudent for advisors or clients to engage in part-time stock picking.

Friction

Two significant adversaries for long-term investors are taxes and investment expenses. Investing in individual stocks typically involves more transactions compared to investing in a diversified portfolio of ETFs. More transactions usually translate into higher costs. Additionally, buying and selling individual stocks can trigger capital gains, which can erode the benefits of tax deferral.

For these reasons, among others, we believe that clients are best served by adhering to a long-term financial plan and avoiding speculative ventures in individual stocks. We strive to help our clients focus on the essential, big-picture priorities, leverage our collective expertise, and mitigate the detrimental impact of friction, including taxes and investment expenses. The most effective way to maintain this focus is using diversified portfolios.

In conclusion, the decision to eschew individual stocks in favor of diversified portfolios is rooted in a commitment to sound investment principles that prioritize asset allocation, recognize the limitations of stock picking, and minimize friction in the form of expenses and taxes. By staying the course with a well-constructed, diversified portfolio, we aim to help our clients achieve their long-term financial objectives with confidence and resilience.

This is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product or services. The content is provided solely for your personal use and shall not be deemed to provide access to any particular transaction or investment opportunity. Amplius Wealth Advisors, LLC does not intend the information to be investment advice, and the information should not be relied upon to make an investment decision. Any third-party information contained herein was prepared by sources deemed to be reliable but is not guaranteed.