With the Facebook IPO looming we begin to get questions like “should we buy this” or statements like “I want some of that.” Well, first of all IPOs are not open to the public. The are usually for the underwriting bank to sell to its clients1. More importantly, however, this brings up the discussion of holding individual stocks in a portfolio vs mutual funds or exchange traded funds (ETFs).
We don’t discourage clients from holding stocks. In fact, you can make a good amount of money investing in individual stocks. But, you can also lose a lot. The risk can be much greater. More importantly, however, is the increased volatility. The average person can not handle the wild swings individual stocks can have. For example, in the last 52 weeks Apple has fluctuated between around $300 to around $645 per share. You have to really understand the emotions involved with investing in stocks in order to do it effectively. Most people choose not to deal with such wild swings but they still want some individual stocks.
It may be stock in a company their mother or father worked at for years. It may be some other sentimental attachment to a company. Or it may be their hear exaggerated stories about a friend of a friend who made thousands day trading using some technique. However they come to the decision to do individual stocks we always recommend they take an approach we call Workhorse vs Racehorse. I honestly don’t know where we heard it called this for the first time but we didn’t name it. We do, however, like the philosophy.
Workhorse money is the portion of your long term assets used to get you to your ultimate goal. It may be retirement or some other goal but its whatever amount will get you there assuming a modest 8–9% growth over the long run2. Part of going through financial planning will help determine this amount. Typically your workhorse money is invested in mutual funds, exchange traded funds (ETFs) or direct placement products (DPPs)3.
Racehorse money is a carved out piece of assets you can afford to lose. Will it sting if you lose it all? Yes. Would it put you out on the streets at age 65 if you lost it? Not even close. For some, it may only be a few thousand dollars to start. For others it may be more. It is still not a good idea to take your money and put it into penny stocks or other extremely risky investments. You want to pick stocks based on strategy you understand.
Another reason we like the Workhorse vs Racehorse strategy is because often clients will have completely different views on risk than their spouses. The more conservative spouse feels much more comfortable taking on risk (racehorse) if they know their is a plan for a large portion of their assets (workhorse).
Matthew B. Brock, CFP®
Senior Partner, Owner
301.466.4833 | email@example.com
Securities and Investment Advisory Services Offered through H. Beck, Inc., Member FINRA, SIPC. H. Beck Inc. and Divergent Planning are not affiliated.
typically their wealthiest clients ^
“long run” is typically at least 10 years ^
can be things like REITs, Limited Partnerships, etc. ^
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities