If you’ve listened to money expert Clark Howard over the years, you’ve likely heard him explain his investing strategy.
Clark prefers diversification and investing conservatively over a long period of time. Therefore, putting a huge percentage of your retirement portfolio into an individual stock, or even a handful of stocks, is dangerous.
So can I tell my spouse they’re wrong if they even go near an individual stock within their retirement portfolio?
That’s what a listener of the Clark Howard Podcast recently asked.
Can You Tell My Husband Not To Buy Individual Stocks?
A husband and wife, both Clark listeners, are having a disagreement about investing.
The husband bought a meme stock based on Reddit posts according to his wife, who wants Clark to set him straight. Should he ever buy individual stocks in his retirement portfolio?
That’s what the wife wanted to know on the June 22 podcast episode.
Asked Suzanne in Georgia: “My husband added to his IRA a small position in an individual company stock. The reason was ‘because people on Reddit think it will make money.’ (The stock is AMC, and the IRA is held by Schwab).
“I told him at the time that a retirement account is no place for stock speculation and he should sell it and put the money into the target year retirement fund. He is over 40, but his retirement savings are under $25,000.
“Most of his IRA (I think) is still in the target-year retirement fund. Several years later, I’ve now learned he never got rid of that stock and thinks there is no problem with this.
“Can you please explain why this is a very, very bad idea? I’m assuming any money it makes gets eaten alive by fees he doesn’t even know he is paying.”
Let’s tackle the fee issue first. There’s good news, Suzanne. Owning an individual stock, including buying and selling, inside or outside of an IRA is commission free. So there’s no pickpocketing going on by Schwab with your husband owning that individual stock.
Is It Wrong To Buy an Individual Stock?
Now let’s try to settle this philosophical investment debate between husband and wife.
I want to note that Clark often gives simplistic investment advice. On his podcast, with a limited amount of time and a wide-ranging audience, he tries to say what will help the most people possible.
Investing can be simple or complex. There are a lot of nuances depending on individual circumstances like age, goals, risk tolerance, wealth level and more.
Clark’s favorite investment recommendation inside a retirement account such as a 401(k) or an IRA is a target date fund. You select the year closest to your retirement and you can put every dollar into that fund.
It automatically puts your money in an appropriate allocation of stocks and bonds and adjusts that allocation depending on how close you are to retirement. Clark calls it “the easy button” of investing. But it doesn’t mean he’s wagging a disapproving finger at you if you stray outside of that.
“If you want to dabble in individual stocks, that’s OK,” Clark says. “Would I have done something highly speculative owning something like AMC? Not my wheelhouse. Not my thing.
“But I don’t think this is a disaster that he has that individual stock as long as most of what he’s doing is in the target retirement fund. And when I say most, I’d say at least 80%, maybe even higher.”
Explaining the ‘Core and Explore’ Philosophy
Charles Schwab, the namesake of the investment company that services Suzanne’s husband’s IRA, trademarked the phrase “core and explore” in 1998.
Clark is a big fan of the underlying philosophy. Especially for those who are itching for something more fulfilling or exciting than plowing 100% of their retirement money into a target date fund.
Core and explore is the idea that you should put a very large majority of your retirement savings into broad-based index funds. Bet your financial future on the entirety of the U.S. economy, Clark often explains, rather than on a handful of individual companies.
“Diversity” is the investment term for this. Target date funds and other index funds spread your dollars around to hundreds or thousands of different stocks.
Once you’ve staked the majority of your future in this way, feel free to take a small percentage of your portfolio and take some positions in an individual stock or two.
Why Clark Loves Target Date Funds
Here’s a more nuanced explanation from Clark on “core and explore” and how target date funds and individual stocks fit into that combination.
“The reason that you always hear me talk ‘target retirement fund, target retirement fund, target retirement fund’ in an IRA or 401(k) at work? Unless you are someone who devotes an enormous amount of time to real research on companies, it’s too much risk for you and your portfolio allocations will likely be out of whack,” Clark says.
“Charles Schwab himself is a big believer in what he calls ‘core and explore’ – the idea that most of your money should be in a broad-based thing where the money is widely diversified. And as you age, more of the [target date fund] money is in things that are less risky in the short term than stocks.
“Owning the ‘explore’ part of what Chuck Schwab talks about is owning individual stocks.”
Clark: You Have Permission To Buy Individual Stocks
Even after that explanation, Clark’s producer on the show admitted to guilt over buying an individual stock.
“I made this mistake once,” Christa says. “I bought an individual stock and I lost a bunch of money on it and I learned my lesson.”
“Sometimes you’ve got to be burned. But the problem is if you have something like what they call the meme stocks and you had a big run-up in it, you’re like, ‘Wow. This is what I should be doing.’ But when you play individual stocks, there’s a lot more risk involved than when you go wide in the market,” Clark says.
“So there’s nothing wrong that you bought an individual stock and lost money in it.”
Said Christa: “It was a great lesson for me.”
And Clark responded to close out the segment: “But I’m not even sure it was a lesson. If you were doing the core and you made an oops on an individual stock, I don’t see that as necessarily a bad thing. It’s not how I play the game, but I don’t see that as a bad thing.”
When it comes to investing in individual stocks, it’s about how much.
You don’t need to avoid buying stocks. But you should limit the percentage of your portfolio devoted to “exploring” to 20% or less.
When it comes to money “mistakes,” investing a small percentage of your portfolio in a large-cap U.S. company stock isn’t a bad one. Even if you “lose.” As long as you’re taking care of your financial future with the majority of your investment portfolio, you’re OK.