Are you thinking about adding an individual stock to your portfolio?
Today the Fearless Advisor explains how to add & subtract a stock from your portfolio—and how F5 Financial recommends letting that stock best work for you!
(The video is 3 minutes. Full transcript is below.)
Full Transcript of video
Hey friends, the Fearless Advisor here. Today we are going to talk about adding and subtracting stocks from your mutual fund portfolio.
Our investment philosophy – Why we use mutual funds and ETFs
Here at F5 Financial our investment philosophy is rooted in efficient market theory, factor-based investing, and diversification. This means we use mutual funds and ETF’s to build the foundations of our portfolios.
Why add an individual stock to your investment portfolio?
However, there are rare occasions when a client wants to add an individual stock to their portfolio. The reasons for wanting to add the stock vary but can include brand loyalty, faith in the direction of the company, or to have a little more control over what investments are owned.
Our approach – How we add and track a stock
Here is the common approach we use to add an individual stock to a portfolio:
First, we want to be sure the investment is meaningful and manageable within the guidelines of your investment policy statement. Therefore, the initial investment should be at least one percent of your investable net worth.
We want to be sure the investment is meaningful and manageable
within the guidelines of your investment policy statement.
Now we let the investment do the work we hired it to do.
- Assuming the stock value grows, we will continue to measure the value of the stock to your investable net worth.
- The maximum percent to investable net worth we want the stock to grow is five percent. At the latest, we will sell the stock at this five percent mark. We can always sell it earlier, but five percent is the max.
- This ensures you never own enough of one investment to make you rich or make you broke. This is a form of greed management.
Finally, once the stock is sold, you can invest the proceeds into the existing mutual fund or ETF portfolio, purchase another stock with at least one percent of your investable net worth and add the remainder to the existing portfolio, or some or all of the proceeds could be used for any cash needs you have as well.
What happens if a stock doesn't grow as hoped?
If the stock does not grow as you had hoped, then you may have to sell at a loss. This is another reason not to own more than five percent of your investable net worth in one stock. It is important to allow the stock enough time to perform. Although there is not a hard and fast rule here, you should give this some thought prior to making the investment.
Emotions vs. an Investment Policy Statement
The most important part of making this change is to add your strategy for this stock purchase to your investment policy statement. Remember, your investment policy statement exists to be your unemotional investment strategy. Without committing to your strategy, you may end up allowing your emotions to guide your investment choices. The outcome of this approach has a high probability of ending outside of your desired plans.
Need a financial plan? Reach out to F5 Financial!
If you do not have a financial plan that aligns with your goals to achieve freedom and significance, we would be happy to discuss your journey. Feel free to reach out to us at F5 Financial. Thanks for joining us!
Photo credit: F5 Financial
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F5 Financial is a fee-only wealth management firm with a holistic approach to financial planning, personal goals, and behavioral change. Through our F5 Process, we provide insight and tailored strategies that inspire and equip our clients to enjoy a life of significance and financial freedom.
F5 Financial provides fee-only financial planning services to Naperville, Plainfield, Bolingbrook, Aurora, Oswego, Geneva, St. Charles, Wheaton, Glen Ellyn, Lisle, Chicago and the surrounding communities; to McDonough, Henry County, Fayette County, Atlanta and the surrounding communities; to Venice, Sarasota, Fort Myers, Port Charlotte, Cape Coral, Osprey, North Port, and the surrounding communities; and nationally.
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