Funds vs stocks

[disneysteve]

I learnt in my modern portfolio theory class that you can create a portfolio of about 20 stocks that provides about the same level of diversification as the S&P 500.

I figure that in 10 years, I'll own 10 different companies and if one of them goes under, that will not destroy my portfolio.

So you were taught that you can get good diversification with about 20 stocks. You have a plan that will take you 10 years to own just 10 different stocks, half of what is needed for that diversification. And how is this a sensible plan? "Don't put all of your eggs in one basket" comes to mind.

I think I have a pretty good ability to pick good stocks.

I have a strategy.

Lots and lots of people are convinced that they know something that the pros don't. I would encourage you to get over it. It isn't true.

[cardtrick]

So you were taught that you can get good diversification with about 20 stocks. You have a plan that will take you 10 years to own just 10 different stocks, half of what is needed for that diversification. And how is this a sensible plan? "Don't put all of your eggs in one basket" comes to mind.



Lots and lots of people are convinced that they know something that the pros don't. I would encourage you to get over it. It isn't true.

I realize that. The odds are against me. I don't claim to know more than the pros. If a stock is down a lot, it's in most cases for a good reason. I don't just buy stocks because they're cheap. I enjoy taking risks and I enjoy researching companies. Why not bet some money on it? The DOW was up 1.84% today and my stock was down over 2%. Not off to a good start.

[disneysteve]

I enjoy taking risks and I enjoy researching companies. Why not bet some money on it?

I have no problem with this. I own individual stocks myself. But speculation should only be a tiny portion of your portfolio, no more than 5-10%.

My portfolio now is too small for it to matter. I just made my first contribution to Roth.

This is backwards. The fact that your portfolio is small is exactly why you need the instant diversification of a mutual fund. Once you have more money, you can afford to build your own portfolio if you choose, though I still wouldn't recommend it. But for now, with a small amount, you are talking about having a "portfolio" of one stock. That just isn't a good investment plan.