Ramit Sethi: Stop ‘Gambling’ on Stocks –How To Invest Instead
Written by
Nicole Spector
Edited by
Cory Dudak
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Everyday, headlines in the financial space are dominated by stock market news, with certain individual stocks stealing the spotlight. Take Nvidia, for example. One day you might hear about how it’s skyrocketing beyond expectation, and the next, it’s taking a nosediving. This mercurial nature is often the reason everyday investors find it difficult to keep pace, even to the detriment of their wealth.
In the opinion of author, entrepreneur and financial expert Ramit Sethi, it’s time to stop “gambling” on individual stocks if you want to be a “real investor.” In a recent video on his YouTube channel “I Will Teach You To Be Rich”, Sethi walked through reasons why investing in individual stocks is a risky move, as well as what to do instead.
You’re Not Going To Pick the ‘Right’ Stock
If you could consistently predict all the right stocks to buy at the right time in order to make a windfall overnight, you’d be the first. Sethi shared that he started doing stock research as a teenager, focusing on stocks that soared and stocks that plummeted, thinking that higher risk meant higher reward. Sethi also restricted his searches to the technology sector, thinking it was an industry he understood and read publications that hyped tech stocks.
“I ended up buying three,” Sethi said. “JDS Uniphase, Excite and Amazon.”
The first two stocks didn’t serve Sethi, but the third — as you may have guessed — made him a lot of money. However, Sethi recognizes his win here was one of “pure luck,” pointing out that picking individual stocks is ultra-risky and seldom rewarding path. Latching on to a needle-in-a-haystack winner seldom happens.
You Will Not Rebalance Your Portfolio
Rebalancing your portfolio may sound a bit advanced, but it’s something every investor should do — and it’s actually pretty simple. Rebalancing is the practice of mitigating volatility and managing potential risk in your investment portfolio. If your money is tied up in one or two stocks, you’re not rebalancing — you’re stagnating, and taking on a giant risk when it comes time to retire.
“What happens if one of those stocks goes down by half?” Sethi questioned. “When you’re young, you can afford to take risks, but as you get older, your investments should shift towards being more conservative. And if you’re stuck obsessing about individual stocks, odds are, you are not rebalancing properly.”
Rebalancing your portfolio is not a one-time deal. You need to be constantly tweaking, strategizing and adjusting your investments to match evolving financial goals. Sethi encouraged investors to focus on target date funds, rather than individual stocks. These are automatically diversified and rebalance as you age.
You’re Emotional With Money
You may have heard it’s incredibly important to be emotionally detached from your investments, but this is easier said than done. If you’re banking on just a few stocks to get you comfortably through retirement, you’re setting yourself up for an emotional meltdown.
“We are all emotional creatures, and money is deeply emotional whether you want to admit it or not,” Sethi said. Money gets especially emotional when all of yours is riding on just a few stocks. You’re likely to react dramatically to dramatic shifts. When a stock goes up, you may react by buying more. When a stock goes down, you react by selling. This is all foolish, and feeds into a major problem American investors have: buying high and selling low.
“Just buy on a regular basis,” Sethi said. “It’s called dollar cost averaging.” When you implement this strategy, you invest a fixed amount of money on a regular basis, no matter the market price, so you’re buying more shares when the price is low and less shares when the price is high. This method lowers your average cost per share, and hedges against volatility. Index fund investing is a great way to do this.
Picking Stocks Takes Way Too Much Time
Not only is hand-picking stocks you’re confident will win a mistake, it’s also incredibly time consuming. Why waste time doing something that is a near guaranteed money loss? Plus, you’re competing against millionaire Wall Street executives who spend their entire days analyzing stocks. Are you going to outwit them? Not likely.
Just invest in low-cost index funds and save yourself a ton of futile research and emotional turmoil. The bottom line is, you just can’t compete against the global market, so don’t bother trying. Go simple and invest in an index fund like the S&P 500 fund.
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