Should Investors Ever Consider a One Stock Retirement Plan?
Some people might have heard about a man named Alexander Green touting his so-called single stock retirement plan at the Oxford Club. For those who are unfamiliar, the claim is that interested individuals can become multimillionaires by investing their money in a single secret $3 stock that is expected to see explosive growth in the near future. Something that is used to convince them to sign up as soon as possible so that they can capitalize on the opportunity as well. Very understandably, most people tend to be rather skeptical of such claims. Furthermore, they would be right to be so because the indication is that the secret $3 stock hasn’t managed to live up to its hype. In short, Green has never stated its name in public, but he has provided a lot of information about it, so much so that Stock Gumshoe was able to guess that it was Foxconn. Unfortunately, while Foxconn is a legitimate company that has seen a fair number of successes, its stock performance has shown no signs of explosive growth. As such, it seems safe to say that the so-called “single stock retirement plan” is a dud for the time being.
Having said that, it is very far from being the sole example of a one stock retirement plan that can be found out there. After all, there are a lot of people who want to maximize their money while minimizing their expended effort, which in turn, means that there are a lot of people searching for the perfect stock. The problem is that this is a very risky plan, thus making it unsuitable for most people when it comes to their retirement plans.
Should Investors Ever Consider a One Stock Retirement Plan?
Generally speaking, most people want stability when it comes to their retirement. In more concrete terms, this means that they want to have enough money to cover their expected costs, thus enabling them to avoid poverty as well as a number of other very undesirable outcomes. As a result, it is very common to see people choosing a portfolio with a high proportion of stocks and a low proportion of bonds when they are young before switching over to a portfolio with a low proportion of stocks and a high proportion of bonds when they are closing in on retirement age. This way, they can get higher growth in exchange for higher risks while counting on the passage of time to smooth over bad performances. After which, they can focus on protecting the wealth that they have saved up while still getting some growth out of it in the process.
Betting everything on a single stock is a much riskier plan. Something that is particularly true if interested individuals are going for the kind of perfect stock that Green described. Everything is dependent on interested individuals choosing the right stock at the right time, which is much easier said than done.
Most people can name one or two trends that are expected to become very important in the foreseeable future. For instance, most people can point out that even more positions are going to be automated as machine intelligence becomes more and more capable. Even if they can’t do that, finding out that information is as simple as submitting some searches on either Google or some other search engine. However, the problem is figuring out which start-ups are going to reap the most benefits from that trend based on very incomplete information. Even worse, people searching for the perfect stock are going to look for start-ups that manage to make it big rather than well-established companies that manage to become even more well-established, which is an additional layer of difficulty on top of everything else. In other words, everyone knows that Google and Amazon are going to benefit from automation, but no one can be sure which start-ups will become the next Google or Amazon because of automation until a relatively late stage in their development.
Of course, there are other stocks that can offer much more stability than successful start-ups. Chances are good that they won’t see their investors making massive returns on their investments, but they should still offer some returns because of their very nature as stocks. In particular, it is interesting to mention dividend aristocrats that have managed to increase their dividend payments for 25 consecutive years or longer. On top of that, there are even dividend kings, which have managed to do the same for 50 consecutive years or longer. Some of these stocks are attached to companies that have managed to perform just that well over just that long a period of time. Others are attached to companies with unusual business models that offer incredible stability while still being quite profitable. Whatever the case, these stocks are interesting for people planning for their retirement because their history of success suggests that they will remain so in the years and years to come. It isn’t quite a guarantee of returns because there is no such thing in the world of stocks, but it isn’t much of an exaggeration to call it the next best thing to it.
Having said that, even if people can put all of their money into a single stock, that doesn’t mean that they should be doing so. Fundamentally, people put their money in portfolios consisting of various stocks as well as other investments because their respective strengths can be used to compensate for each other’s weaknesses, thus enabling the portfolio to achieve higher returns while reducing risk in the process. As a result, when people choose to put all of their money in a single stock, they are effectively sacrificing some of the best tools that they have at their disposal for achieving their financial goals in exchange for an easier time setting up their portfolio as well as running their portfolio. That is very much not a good thing. Simply put, retirement planning is important, which is why interested individuals should put some serious time and effort into the whole process. That might not be easy, but in the end, their time and effort will be very much worthwhile.