#14 Who benefits from stock picking?

What is single stock picking?

Single stock picking is the targeted selection of individual stocks for the portfolio. This differs from broad diversification through ETFs or index funds, where an entire stock market is represented in the portfolio.

Many investors tend to build up their portfolio with individual stocks. This is either because they are convinced that they are able to predict which shares will perform better or because they can identify more strongly with their portfolio with individual shares of well-known companies (such as Novartis, Nestlé or Tesla).

Challenges and disadvantages of single stock picking

One challenge with single stock picking is that you have higher volatility and therefore a higher risk in the portfolio than with a broadly diversified ETF or index fund. All the more so if the number of instruments, i.e. the number of shares or bonds in the portfolio, is small. Examples such as Swissair, Enron, Lehmen Brothers and Wirecard illustrate the risk.

A second problem with single stock picking is that you are tempted to trade more and more. You may like one stock now, but in six months' time you will find other stocks much more exciting because they will be in the media.

Do you need individual stocks in your portfolio?

Individual securities do not add any value to your returns, which is why you can confidently do without them. With an ETF or index fund, an entire equity or bond market can be mapped much more efficiently and diversified. You also save costs and don't have to worry about stock picking.

Have you ever made a big profit or a total loss with a share? What are your experiences with single stock picking? Write an e-mail with your feedback to Felix Niederer.