Stock Picking: What It Is and What It Isn’t
Whether it’s through a friend’s barbeque or a financial news station, you’ve probably overheard discussions about stock picking. Inevitably, when this conversation is brought up, you’ll also hear about tips or predictions on which stocks are surefire picks for excellent future performance.
With the high prevalence of stock picking with both amateur and professional investors, it can be tempting to learn more about it and even attempt to do it with your wealth. With that in mind, here are some focal points on stock picking, and whether it’s a wise idea for your goals and needs:
What stock picking is
Stock picking, as the name suggests, involves choosing individual stocks based on the likelihood that they’ll increase in value in the near-future. Investors might focus on the company’s financials, a new product, or numerous other factors that potentially indicate a jump in stock prices. By concentrating their wealth into these assets, investors are hoping they can sell them in the future for a greater profit.
What stocking picking isn’t
When it comes to stock picking, you’re essentially putting all of your eggs into one basket (or a few), and it’s worth noting what stock picking often isn’t: a viable strategy for long-term success. In all likelihood, by the time you’ve heard about a factor that will influence a stock’s price, the market has already accounted for it. This leads to the quintessential error of buying an asset when it’s already high. Largely thanks to this phenomenon, there’s a wide behavior gap between what most investors earn and what the market itself earns.
Why diversification is your best friend
Diversification – which has been dubbed the only “free lunch” in investing – has been academically proven to reduce your potential risks while generating the similar or greater returns. Rather than picking individual stocks, it involves spreading your investments across multiple asset classes (such as bonds and commodities), and investing in a wide selection of stocks across the investment universe. Although you may partially miss a rare big win from one investment, you’ll also avoid the danger of losing all your hard-earned wealth in a losing one.
At LexION Capital, we craft well-diversified, bespoke portfolios for our clients so they can achieve their long-term goals and needs. If you’d like to learn more about our diversified approach to investing, contact us today.