Find out why investing in a single company is much riskier than investing in the whole market.
Most of us would have witnessed the stunning spectacle of multicultural dance performances at our National Day Parade and been amazed at the fascinating displays of human synchrony. Some of us may even recall participating in the marching parades or being part of the squad that flipped flashcards from the stands during our youth.
Although everything seems to move perfectly in sync from afar, if you were to focus on a single person, things get much more random. The person might go left when the group goes right, or perhaps he or she might lag or fumble. I’m sure you’d agree it is much more enjoyable to watch the performances in its entirety rather than to focus on a single person.
Investing is the same. Just as how one performer could miss a beat, individual companies could move in a different direction from the market. Perhaps the company has been suffering from poor management decisions or has recently launched a product line that is not doing so well. Therefore, investing in a single company is much riskier than investing in the whole market. Research has also shown it is very difficult to pick stocks that will do better than the market consistently.
However, when we take a wider view of the global stock market, over time we notice a distinct and predictable pattern: The stock market always goes up! So do not attempt to pick individual stocks. Broaden your selection to look at the entire universe of stocks so that you can enjoy the performance rather than fret over any individual performer.
This series is adapted from the book, 27 Principles Every Investor Should Know, written by Steven J. Atkinson. Read the rest of the principles:
- Investing Principle #1: Always Start With A Plan
- Investing Principle #2: Start Investing As Early As You Can
- Investing Principle #3: Invest For The Long Term
- Investing Principle #4: Investing Is Hard – Get Help From A Trusted Advisor
- Investing Principle #5: Know the Difference between Advisers and Salespeople
- Investing Principle #6: Put Science and Academic Research on Your Side