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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25223  
Subject: Re: Roth 401K-brokers that allow individual stoc Date: 8/11/2013 10:35 PM
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Right now I have invested $5,000 of the money in our IRA's to buy individual stocks and have made $650 in about 3 1/2 months. I don't know if that's considered good but it's a lot better than when a broker that does this as a profession, all day long, was managing it.

So, you have 'made' (not really, because you don't actually make money until you sell) 13%. The S&P 500 was up about 10% in the last 3 1/2 months. So, you did slightly better than you would have in an S&P 500 index fund. However, with $5000 you cannot be very highly diversified which means that if one of your stocks tanks tomorrow, for whatever reason, you will give up most, if not all, your paper gains. With a S&P index fund, it would take the entire market to drop at least 9% to give up give up most of your gains. It could happen, but if the S&P 500 were to drop that much, I suspect that your individual stocks would also suffer significant losses, also wiping out most, if not all, of your gains, since many times in market declines, the high fliers are also the stocks that drop the most. And if you have more than 4 individual stocks (not nearly enough to be well diversified), even at only $6.95/trade (commission at Sharebuilder) and 1 buy & sell per stock, your commission costs for the position would be $56 - which is more than 1% of your $5,350 current value.

It might work out for you. But with few stocks, you have significant single stock risk, which could wipe out not only your gains, but a big chunk of your principal, too. And in order to own the 15 - 20 individual stocks that a well diversified portfolio generally needs, so you can minimize your single stock risk, it would cost you over $250 to both buy and sell the stocks, even at only $6.95/trade, and single buy/sell trades. In order to keep your commission costs down close to the costs that you can get with index mutual funds, you would have to have a $50,000 portfolio and be willing to hold each of your stocks for at least 2 1/2 years.

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