When to buy individual stocks

Hanging out with friends. Jan 15

When should we buy individual stocks? Last!

Many investors feel lured by the magic of the stock market. They hear about amazing IPOs (Initial Public Offerings) and they hear stories such as: ” If you would have invested in (Insert company name) 5 years ago, you would have been a godzillionaire by now.”

Others feel enticed by penny stocks, they want to find that one stock which moves from $0.10 to $0.15 in one week and they plunge right in.

Those above mentioned scenarios are part of the learning curve. At times we are lucky and we make a nice return, other times we fall on our faces right away.  Either way, investors or speculators eventually drop out or decide to learn more.

So, here is the question again: When should we buy individual stocks?

In almost all my previous articles I have promoted investing in broad based Index funds or ETFs (Exchange Traded Funds). In particular, for a Canadian, I suggest to invest 1/3 of the Portfolio in a Canadian Index fund, 1/3 in a US Index fund and 1/3 in an international index fund. That way you have global diversification and your portfolio is less volatile than if you had just Canadian stocks.

Let’s say that you follow my recommended portfolio and you decide to invest $6,000 every year. If you invest $2,000 in each of those funds you will be on track to achieve your financial goals. Now, after meeting those goals, if you run into any additional money, then may use that money as “play money” and invest it in individual stocks.

Some ideas to buy individual stocks

The Canadian economy is divided into different sectors, for example:

Utilities
Financials
Energy
Telecommunications
Industrials
Health Care
Technology…

What I would do is to start with one representative of each industry. For example, in the financial sector, I would chose one of the banks, Let’s say Royal Bank.

In the Telecommunication sector I would buy one of the internet providers, let’s say Telus. So on and so forth.

Then I would look at their stock value and only buy the stocks which seem to be going up. Immediately after buying, I would put a “Stop loss” order. This means that if the stock drops more than a set money amount or percentage, the broker should sell automatically. When you put an automatic stop-loss you protect yourself from big losses and you detach yourself emotionally from your investment.

For example. As of Today, June 12, 2017, the whole energy sector is down, so I would not buy any stocks in the energy sector. But let’s say I did, let’s say I bought Enbridge, which today is trading at $52.12. Then I would put a stop loss. Many expert recommend putting a stop loss at 7%. In the case of Enbridge, if the stock drops more than $3.65, then your broker would sell automatically the stock for you.

The idea is to let  your profit run and to cut your losses short. If Endbridge goes up, you move up your stop loss. If you Enbridge goes down, then the maximum you would loose is 7%. If you do that with all the industries, then you will be diversified, you will participate in the market when it is going up and you will be in cash when the market is going down.

Good luck!

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2 thoughts on “When to buy individual stocks

  1. Is there still a problem with stop losses selling off assets during flash crashes? What are your thoughts on restructuring the stock portfolio if the stock does well compared to the overall portfolio?

    1. Hello Jordan,

      Yes, there is a problem with stop losses during flash crashes, this could really ruin your investments. As far as I can remember, there was one flash crash witch brought the whole market down for a day. A lot of people suffered that day. And yes, there is a solution for that which I will cover in a future blog. For the purpose of this particular blog. Most of your wealth would be in low cost index funds and the individual stocks would be purchased only after your mayor financial goals are met.

      As for the second part of the question. Let’s say you bought Apple, and Apple continues going up and up to a point where it is a major part of the portfolio. In this case, I would continue raising the stop loss sell signal. Imagine that the 50 days moving average is your sell signal. You continue riding that baby up until it stumbles, as soon as it crosses the 50 days moving average your sell signal is triggered and you are out with a fat profit.

      If we assume that a stock has 50%-50% chances of going up or down, you will get out of the losing trades as soon as possible and you would let those winning trade ride as long as possible.

      Most successful traders have a success ratio of less than 50%.

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