If you’ve listened to the Dave Ramsey show for any length of time, you’ll hear him say that he doesn’t invest in single stocks. Instead, he invests in “good growth mutual funds and paid-for real estate”. His reasoning is that single stocks are too risky.
I wonder though, is that true? If you’re talking about putting all of your money into ONE single stock, I totally agree. Of course it’s too risky to put all of your eggs in one basket. That’s like putting it on a roulette wheel. Even putting it all on a few different stocks would be extremely risky.
On the other hand, what IS a “good growth mutual fund”, exactly? It’s a fund that invests in securities. (Usually stocks, bonds, and money market accounts.) Which means…you’re in a variety of single stocks. Plus bonds and money market accounts.
How is that any different from investing in a large number of diversified stocks, bonds, and money market accounts yourself? I don’t think the danger is so much the dreaded “single stocks” as it is in not being fully diversified or choosing stocks without doing thorough research.
Of course a mutual fund manager likely has significantly more experience in investing than most individual investors, which can greatly reduce risk as well. Finally, mutual funds are able to invest extremely large amounts of money, since they are pooling the resources of many individual investors. This gives them opportunities that individual investors may not have. So mutual funds probably ARE less risky than single stocks for the majority of people. (Although it depends on the mutual fund, too.)
But simply to blindly label the whole category of “single stocks” as “too risky” is over simplifying things. I have a problem with that because when people hear a mantra over and over again, they begin to believe it without questioning. One thing I always want to do in investing (and the rest of life!) is question. Questioning leads to understanding, which leads to more informed decisions.