Is there a place for individual stocks within clients’ portfolios?
Rosa Ybarra, a CFP and senior financial planner at Tranquility Financial Planning in McAllen, Texas, said that, yes, there is room, though she recommends that clients have no more than 5% of their overall portfolio in individual stock positions.
“By having a small allocation to individual positions, we feel that our clients’ portfolios could receive a boost in their overall portfolio returns,” she said.
If clients wish to purchase individual stocks, Ybarra advises them to review the companies’ revenue growth, financial position, earnings potential and current stock price.
Mark Paccione, a CFP and the director of investment Research at CAPTRUST in Raleigh, North Carolina, said that emotionally, clients might want to include the stocks of companies they know and personally cheer for, a concept discussed within the emerging study of behavioral finance.
“While most investors accept the risk-reduction benefits of a diversified portfolio, it’s hard to root for a diversified index ETF or mutual fund,” he said. “Some clients prefer to invest in the stock of companies they know and trust and may derive some satisfaction from supporting those companies they believe in.”
As long as no single stock represents too large a percentage of an investor’s portfolio, which Paccione also recommends be limited to 5%, and as long as no stock within the S&P Global Industry Classification Standard sector represents too large a slice of the portfolio, individual stocks “can certainly be a part of a balanced portfolio, if that’s what the investor prefers,” he said.
There is also a place for individual stocks within a portfolio, when there is a holding with a large gain that can be reduced over time using some sort of gifting strategy, said Catherine Seeber, a CFP and a vice president and financial adviser at CAPTRUST in Doylestown, Pennsylvania.
Anjali Jariwala, a CFP and the principal of FIT Advisors in Chicago, said that her investment philosophy focuses on having a diversified and well-balanced portfolio.
As such, she does not recommend individual stocks in a portfolio because that deviates from diversification.
“However, I am not opposed to giving my clients a small pool of money that they can ‘play’ with if they have interest in purchasing individual stocks,” Jariwala said.
“I just ensure that the rest of their portfolio is aligned to meet their short-term and long-term goals," she said. "The amount of play money I allow my clients to have is based on the rest of the portfolio and making sure that even if this pot of money goes to zero they will still be OK financially.”
Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.
This story is part of a 30-30 series on building a better portfolio.