A portfolio comprised of individual shares can entail not only hard work but a lot of financial risk.
Yet, some people really like doing this. Is it a good idea?
For some, having shares is fascinating, even addictive, and they cannot resist them. They just love watching them rise, and when the going is good, they tend to believe it will stay that way.
When the market eventually drops, the fun ends, but they may then be trapped in the market, or have to sell at a major loss. Investors need to be extremely careful and skilful in their stock selection. And they need to get their aims and priorities straight.
Andreas Hackethal, a professor of finance at Goethe University in Frankfurt, argues that the two main reasons why people invest in individual shares are an over-estimation of their own abilities and sensation seeking.
In other words, they get a kind of high or kick when their shares go up, but just like taking real drugs, at some point the thrill wears off, and these thrills are not cheap. There is a phase of blissful ignorance, followed by a reality shock.
Funds are in a sense like manufactured goods off the shelf, whereas individual shares are tailor made. This can make them very appealing, but doing it right is time-consuming, and those who do not understand what they are buying and monitor them constantly can pay a high price, in some cases literally in both senses.
Thrill seeking?
Those buying stocks need to decide if they want the thrill of gambling or to pursue wealth rationally. The two can be mutually exclusive.
The financial literature even refers to gambling psychology in the context of investment, and lottery tickets as an alternative to the stock market. The point is that if one really wants to gamble, the stock market is probably the wrong place, as investing in shares requires not only knowledge and skill, but cool rationality.
One is not supposed to fall in love with one’s shares or to take imprudent and unnecessary risks. By contrast, that is arguably precisely what casinos are there for.
The essence of the matter is for people to know what they want. Is it to gamble for fun or to invest for a profit, or perhaps a bit of both? If the aim is really to gamble, the stock market will invariably be handled very differently to a rational, profit-oriented investment strategy.
It has a lot to do with self-insight and not going down the wrong path, which can lead to distress and financial disaster.
Enormous losses can be incurred through a misconceived, mismanaged, or, to use the regulatory term, unsuitable portfolio. Thrill-seeking behaviour can ruin investors.
