The stock market can be a roller coaster ride (DALL·E)

Investing in the stock market is equally rewarding and daunting.

When I first started to read up about investing, every book repeatedly advocated buying index funds or exchange-traded funds. This was not what I wanted to hear, but if every successful investor advocates for index funds, can they all be wrong?

But here’s the thing about investing: You don’t have to choose one path only. You can combine an ETF strategy with a stock-picking strategy. So based on the lessons I’ve learned over the past 16 years, I’m going to highlight where I think beginners can start on their stock-picking journey, if they find ETFs alone to be monotonous. However, let’s first build the case against stock picking:

The Cons of Stock-picking

Lack of diversification

One of the primary drawbacks of stock picking for beginner investors is the lack of diversification. When you invest in individual stocks, your portfolio can become heavily concentrated in a few companies or industries. This concentration can expose you to higher levels of risk, as poor performance in a single stock can have a significant impact on your overall portfolio.

Higher risk and volatility

Stock picking can be riskier than investing in diversified funds. Individual stocks are subject to greater price volatility, and their performance can be influenced by company-specific news, industry trends, and global economic factors. Beginner investors may not have the experience or knowledge to navigate these risks effectively.

Time-consuming research

Researching individual stocks can be a time-consuming process. Analysing financial statements, studying market trends, and staying informed about news related to specific companies demand a significant investment of time and effort. Beginner investors may find it challenging to dedicate the necessary time to conduct thorough research.

Psychological stress

Stock picking can be emotionally taxing, especially during market downturns. Watching the value of individual stocks fluctuate can lead to anxiety and stress, potentially leading to impulsive decisions. Investors who are prone to emotional reactions may struggle with the psychological toll of stock picking. Remember the FOMO buying of 2020 and the panic selling of 2022? Stock picking is not for the faint-hearted.

Combining an ETF strategy with stock-picking

1.   Always start with ETFs in your tax-free account. Begin your investment journey by allocating a portion of your portfolio to ETFs. These funds provide exposure to a broad range of stocks and offer stability and diversification.
2.   As you gain confidence and experience, consider gradually incorporating individual stocks into your portfolio. Start with a small percentage of your investments in handpicked stocks. This approach allows you to learn and make mistakes with a limited portion of your portfolio.
3.   Always start with Industries, then move over to Companies. For instance, if you want exposure to mining, narrow it down to gold, copper, lithium, iron ore etc. Then choose companies. Work in an organised fashion. It helps lower anxiety.
4. Use a stock screener. It’s one of the most underutilised free tools. For instance, if you only want to invest in profitable mining companies, a stock screener will filter out the loss-making ones for you immediately. Yahoo Finance is my favourite stock screener.
5. Ever heard of “Invest in companies where you spend your money?” I advocate for this approach for brand new investors who have never done any company research. Why? Because you need practice in stock research, and researching Shoprite is way easier than researching Palantir.
6.   Spy on ETFs and Bundles to find amazing companies. This does not mean copying what the ETF or Bundle is doing. ETFs and Bundles often select companies based on strict criteria. Look at the top companies in a few ETFs or Bundles. You will often see that certain companies are repeated over and over. Go and research those ones.
7.     Keep an eye on trends in the news and your surroundings. Good companies are often hiding in plain sight. If something repeats itself, find the listed companies attached to that trend. The internet, electric vehicles and online shopping all snuck up on us while we were participating in most of them as customers, but never as investors.
8.   Invest time in learning about the stock market, fundamental and technical analysis, and investment strategies. Continuous education can help you make more informed decisions when selecting individual stocks.
9.   Define your investment goals and risk tolerance. Knowing your objectives will guide your stock picking choices and help you stay focused on your long-term financial plans.
10. When selecting individual stocks, diversify your holdings across different industries and sectors. This diversification can help mitigate risk in your stock-picking portfolio.
11.   Investing is truly a long-term undertaking. Avoid the temptation to constantly trade or react to short-term market fluctuations. Patience and discipline are essential for successful stock picking.

Conclusion

Stock picking is an exciting way for beginner investors to engage with the stock market. It offers a unique learning experience, customisation options, and the potential for higher returns. However, it comes with its own set of risks, including a lack of diversification and higher volatility.

For beginner investors, a hybrid approach that combines ETFs with carefully selected individual stocks may be the most prudent strategy. This approach allows you to learn and grow as an investor while maintaining a level of diversification that reduces risk.

Ultimately, the decision to engage in stock picking should align with your financial goals, risk tolerance, and commitment to learning and research. Regardless of your approach, it’s essential to approach investing with a long-term perspective and a well-thought-out plan to achieve your financial objectives.

Rochelle Warries is a qualified chartered accountant with 16 years of experience and a seasoned stock market investor. Her passion is helping novice investors build healthy investment portfolios through financial education.

She is founder of Soul Financial, a website offering financial education and coaching. You can find her on Twitter: @soulfairy3