401(k) or Individual Stocks?
Q: Is investing in individual stocks through a brokerage account better than investing through a 401(k) account? — A.A., Salisbury, Maryland
A: Either can work well. You’ll have more control and the possibility of faster growth with individual stocks, but that can also be a riskier strategy, since one or more stocks might severely disappoint you.
With a 401(k) account, your investment choices will typically be far more limited; you may have to choose from a small group of mutual funds, for example. But 401(k)s offer tax breaks, and if your employer matches part of your contribution to your account, that’s free money.
You can actually do both — use your 401(k) and also invest in some individual stocks. But if you’re not going to research and keep up with those individual stocks, just stick with a low-fee, broad-market index fund or two — which you can probably also invest in through your 401(k).
Whichever route(s) you take, start saving and investing as soon as you can to give your money lots of time to grow. You can learn much more about retirement and investing via our “Rule Your Retirement” service at Fool.com/ services.
Q: How often should I review stocks I hold in my portfolio? — E.M., Dallas
A: Ideally, follow those companies at least every three months, when they issue their quarterly and annual reports. Read the reports and their accompanying press releases and financial statements — all of which are typically found on the companies’ websites. Check for any articles about the companies at Google
News and at Fool.com. You can check on big, established companies less often, but the more you know about all your holdings, the smarter the decisions you can make about your portfolio.
Phil Fisher’s 15 points
In his classic investing book “Common Stocks and Uncommon Profits” (Wiley, $25), Philip A. Fisher laid out “Fifteen Points to Look for in a Common Stock.” Decades later, these questions can still help us identify promising investments. Here are some of them: “Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?” There’s little point investing in a company that’s not growing.
“Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?” Look for companies investing in research and development, with demonstrated innovation skills.
“Does the company have a worthwhile profit margin?” and “What is the company doing to maintain or improve profit margins?” Ideally, you want a profit margin greater than those of competitors, and margins that are increasing.
“Does the company have outstanding labor and personnel relations?” Satisfied employees tend to stick around and be productive; disgruntled ones, less so.
”Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?” Great businesses tend to have sustainable competitive advantages, such as Disney’s strong brand or Apple’s networking platform, which keeps users more and more tied to its ecosystem with each new product.
Reading Fisher’s book can make you a much smarter investor.