Individuals Have No Business Picking Stocks? Really?

by: Roger Nusbaum

Thursday on CNBC Steven Rattner made a lot of noise by noting that individuals have no business picking stocks, that they should instead only use index funds. Later in the day the network picked up the ball to try to extend that conversation in a segment with Thomas Lee from JPMorgan and Roger Crandall from Mass Mutual. The segment was a dud due to the guests. I believe the right questions were asked, but the answers offered no real help to individual investors.

Crandall kind of agreed with Rattner but also kind of disagreed (please leave a comment if you heard it differently) noting that 70-80% of the people they talk to want professional help. That is of course a useless stat, you would think a firm whose business it is to provide investment advice would not spend a lot of time talking to people with no interest in investment advice.

In terms of thinking about the entire US population, which is where the conversation started, it is a small percentage of people who are attached to the market enough for this to be relevant. The closest many people will ever get is a 401k that hopefully accumulates into something meaningful, but the statistics on this tend to be grim.

So really this is a conversation about a subset of the US population and I think it is reasonable to conclude that this subset has more money on average than the rest of the population. If they have more money for what ever reason then they might be inclined to have more interest in what to do with that money including being involved with capital markets. Obviously someone with this interest might be more inclined to spend a reasonable amount of their time on the stock market.

There is some percentage of this subset that should not have much involvement with picking individual stocks. Hopefully that percentage is small but it exists. Everyone has things they simply should not do and for some folks it is picking individual stocks. For most other members of this subset the suitability for including individual stocks in their investment portfolios boils down to the amount of time they are willing and able to spend on investing and of course their investment philosophy -- someone could spend 80 hours a week studying markets but not believe in picking stocks.

Although some of the tweets solicited for the segment touched on this, for many people the answer is likely to involve a combination of funds and individual stocks. It is reasonable that someone who is very interested but not able to devote a full work week to the task could pick stocks for some portion of his portfolio even if not the entire portfolio. Even with the time to spend, there are still segments where a fund will be the better investment choice.

For example someone might want to use the Global X Norway ETF (NYSEARCA:NORW) for some or all of the energy exposure. The fund is 50% energy with much smaller weightings in the other sectors. If the investor is comfortable with stock picking in this sector then maybe they could combine NORW, or some other ETF with a stock or two; maybe one stock for yield like some sort of pipeline company and maybe some sort of niche play like a Bakken name or oil sands or something else.

With a sector that the investor is not comfortable with picking stocks then just using a single ETF for that sector can work. Maybe the investor doesn't know a lot (relatively) about utilities then something like the Utilities SPDR (NYSEARCA:XLU) can work.

Another approach is using a broad based fund, or maybe several to cover a lot of asset class ground and then layering on a few stocks as a version of core and explore. I would be wary of this as I think it increases the chances of owning too much of the wrong sector at the wrong time -- think owning SPY 12 years ago with four tech stocks like Juniper (NYSE:JNPR), Commerce One, Exodus and Akamai (NASDAQ:AKAM). That type of mix back then was quite plausible. SPY had 30% in tech plus however much of the portfolio was devoted to explore with names like this and the tech wreck was made much worse.

This is just one of several reasons why I prefer looking at each sector and making a decision about weighting versus the benchmark.

I would close out with one final, related point. I write a lot of posts that are more about lifestyle issues and thoughts about trying to understand what is really important. Bigger picture this is about getting to know yourself because if you understand what you are really about (many people do not) then you have a better chance of figuring out what type of investor you should be which should better orient your portfolio toward meeting a more properly defined objective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.