Most people know that the dream of picking a winning lottery ticket and striking it big is not very realistic. Yet people go into investing with the belief that they can pick “the perfect stock” and strike it big without realizing it’s not much different from playing the lottery.
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If you’re trying to buy individual stocks, you’re working too hard. Viral finance educator Chris Browning, known as “the popcorn finance guy” and founder and host of the award-winning Popcorn Finance Podcast, gave three reasons why you shouldn’t be trying to buy or pick individual stocks.
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1. Even the Most Sophisticated Can’t Crack It
Browning got his degree in finance with an emphasis in financial planning but said in a recent Instagram post that even with all that education “the odds are not in my favor.” In fact, he said, even people paid “a lot of money” to pick stocks can’t always do it successfully. What makes the average investor think they’ll be any better at it?
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Why Is Stock Picking Hard?
Part of what makes stock picking so difficult is summed up in something called the “Efficient Market Hypothesis” which suggests that all the information that helps you predict a stock’s rise in value, from company performance to economic outlook, is already “baked in” to the stock price. So, you’re not likely to find undiscovered gems that aren’t already priced as they should be.
The only other sure-fire way to pick a stock is illegally, with “insider information” that nobody else has and which can give you an advantage.
There’s also the problem of human emotion and ego that gets people in trouble when stock picking. According to RBC Wealth Management, things like “following the crowd” (jumping on a trend); avoiding pain (under-investing or picking); selective confirmation (seeking stocks that somehow confirm their ideas about an investment) or just plain panic buying or selling all tend to work against good results.
Browning doesn’t fight this truth, saying, “I’m not going to be good at it.”
2. Finance Experts Are Not Motivated, So Why Should You Be?
Browning’s second reason is a simple statement, “I don’t want to.” Reflected within that statement is a larger truth: Finance experts aren’t motivated to try stock picking because they know it’s unlikely to work.
Instead, you should put your energy into investing strategies that work, he said, like index funds over individual stocks. Index funds are a kind of bundle of stocks organized into a larger fund that bring a reliable kind of return and a lower risk.
3. It’s a Waste of Time
Browning brings his signature blunt style to his third reason as well. “Ain’t nobody got time for that.” Instead of sitting around trying to ineffectually guess and hope and wish that he can land on a “magic” new stock that is about to surprise the market with its performance, he’s going to focus on tried and true investment practices.
Instead, Consider:
Investing in low-cost index funds: Put your money in these funds and dig in for the long haul, as they tend to perform best over time.
Investing in ETFs: Exchange-traded funds are somewhat similar to index funds in that you invest in a diversified portfolio of assets, but they can be traded like individual stocks. You can choose from ETFs focused on sectors, such as tech or healthcare, or dividend-paying stocks, while keeping costs and risks lower.
Automating with dollar-cost averaging: The best way to make money in the stock market is to keep investing a consistent regular amount (ideally automated), over time, for a steady return. Sometimes stocks will be up, sometimes down, but you’ll stay the course and reap the returns.
Stock picking sounds exciting, but for the average investor, it often leads to lower returns and higher stress. Take Browning’s advice and lean into strategies that have proven results, not unexpected outliers.
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This article originally appeared on GOBankingRates.com: 3 Reasons Buying Individual Stocks Is a Mistake, According to a Viral Finance Educator
