Rules of the Game: Don't Candy-Crush Your Portfolio

 | Apr 02, 2014 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

gm

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crox

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king

Let's continue on the headline analysis I did in my last column. I never stop having fun with this -- so why stop?

Here's a recent headline from the Wall Street Journal: "Regulators Failed to Open GM Probes." The story, as you might guess, focuses on why Congress took so long to investigate reports of faulty ignition systems in General Motors (GM) cars.

Believe it or not, I'm not going to snark about this particular story. It's great when the media function as Washington watchdogs. If anything nudges Congress toward actions that help the American people -- as opposed to helping themselves -- I'm all for it.

No, I want to zero in on the idea of trading or investing in single stocks. Note what I said: single stocks. Somebody wrote a comment below one of my columns a few weeks ago, suggesting that I was anti-stock. For heaven's sake! Why would I be against stocks, the best investment to generate excess return and stay ahead of inflation?

I'm against single stocks. It's absolutely crucial that investors, even those with a more conservative philosophy and risk tolerance, have equities in their portfolio. But it's insane to bet on the fortunes of one stock over another, when so much can go wrong, and all the technical warning signals in the world can't save you.

If you recall Crocs (CROX) in late October 2007, you'll know what I'm talking about. I suppose avid chart studiers can come up with reasons in hindsight -- heaven knows I spent hours poring over that chart myself, trying to read the tea leaves. I lost a bundle on that trade; plenty of professionals did, too. There really was no warning.

Plenty of wealth was lost in Crocs' plummet. I didn't realize at the time how senseless it was. I didn't understand that boring, sleepy, vanilla, passive index investing trumps trade-mania every time. And by every time, I mean the expected return over rolling multi-year periods. I don't mean, "Such and such a stock beat the S&P 500 this year." Good luck with that. It's not a strategy. It's a bet.

What percentage of the headlines are focused on specific stocks or sectors? (That's a rhetorical question. I have no idea, and it doesn't matter.) It can be interesting to learn how various industries and sectors are doing, and to know that King Digital Entertainment's (KING) initial public offering was something of a dud.

But if the fates of any individual stock have a "candy-crushing" effect on your portfolio, you better rethink your approach, because it's broken.

You like social media companies? Energy? Health care? Great! Buy them all! Will you leave some rocket-ship-style gains on the table occasionally? Of course. But will you avoid situations like Crocs in 2007? Yes to that, too.

And think about it. Your financial media consumption will be a whole lot more relaxing, because you're no longer looking for "ideas," but just reading to stay informed and have some interesting conversation topics for that next dinner party or golf outing. Doesn't that already feel more peaceful? 

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