Why You Shouldn’t Buy Individual Stocks

3. Stock spin-offs

A publicly held company can spin off part of its business into a new publicly held company. An example of this is GE spinning off its health care business earlier this year. Not only do shareholders have an additional stock to keep track of, they will likely have to calculate a new cost basis when they sell. That’s because part of the original cost basis belongs to GE and part to GE HealthCare. If your brokerage company holds the security and if you bought it after 2011, they will keep track of this for you, but at the very least, this adds to the complexity.

4. Rights issues

For various reasons, some companies issue the right to buy more shares of their stock. It’s essentially an invitation to shareholders to buy additional shares, often at a discount. Deciding whether or not to exercise or even sell these rights requires a very complex analysis. If many investors exercise their rights and the company issues a significant amount of new stock, your shares will be less valuable, all other things being equal. If you do exercise your rights, you have to invest more money in the stock.

5. Class action suits

Quite often in America, companies are sued on behalf of shareholders for such things as issuing misleading information. To participate, you may have to fill out lengthy forms and provide data about when you bought the shares and for how much. That requires a lot of work for what may turn out to be only a few dollars. The fund can do all of this for you.

Many of these reasons not to buy individual stocks are complex, which is yet another reason not to buy them. But as I write this article, I’m feeling a little pain, because I’m one of those fools. This is going to sound just a bit defensive or rationalizing, but I buy an occasional stock to have a little fun. I call it my gambling portfolio, and it exercises a piece of my brain that craves some thrills and chills but doesn’t impact my family’s goals.

To illustrate why this was foolish, let’s look at my purchase of Xerox Holdings (XRX). I bought a small amount sometime after the dot-com bubble burst in 2000. I no longer have an easily obtainable record of my purchase price, since I moved the shares to a different broker and it didn’t carry over. Although I bought the stock after it had plunged nearly 90 percent, it has been one of those 96 percent of stocks that has been a dog. Then, at the start of 2017, Xerox Holdings spun off its business process services company, called Conduent (CNDT).

To make matters worse, I received a notice last week of a class action suit. To participate, I’d have to spend quite a bit of time. It probably isn’t worth it. Can it get worse? Sure. For a time, Conduent was considering spinning off another company, which would create even more complexity.

I have the vast majority of my stock investments in ultra-low-cost index and diversified index funds. Yet even the small percentage of individual stocks I buy in my gambling portfolio to fill that thrill-seeking need makes me a bit of a fool.

My advice

Get your excitement from somewhere other than investing. Let a low-cost total stock index fund give you diversification and a greater likelihood of higher returns. Let the professionals read the proxies and legal work and do the associated research. You have better things to do.