The Rising Risk of Stock Ownership

Earnings Bombs, Etc. Expose Growing Concern

“BOEING, GOING, GONE” “FACE(BOOK)-PLANT” “HAVE A COKE…AND A FROWN” “WALGREEN TURNS RED”As far as I know, these are not actual headlines about big, one-day drops in individual stocks. But they could be. And they describe something I think is gradually bubbling up underneath an investor psychology that can best be described as complacent. As someone who is immersed in the investment marketseach day, there are things you notice anecdotally that, when you actually run the data on them, you realize you were not just imagining things. This is the case when it comes to the rising risk of individual stock ownership.

Here is a summary of what I see, and some data to back it up:

  • The long stock market advance since the Financial Crisis low in 2009 has encouraged investors to own, and perhaps speculate, in individual stocks.
  • This has bruised the mutual fund industry, which has had steady outflows of assets. Translation: paying someone to diversify your stock holdings for you is a lower priority than in the past.
  • ETFs have burst on the scene, but the overwhelming emphasis of the advisors that use them is to simply “buy the market,” such that investment portfolios are steeped in the largest names in the major stock indexes, principally the S&P 500 Index.
  • The stock bull market has created an environment where a couple of bad eggs in one’s portfolio will not create much of an issue, since the overall market is a tide lifting most boats.
  • The bull market won’t last forever, and changes in the way individual stocks are battered in a heartbeat following a perceived piece of bad news (earnings, product announcement, government intervention, commodity price changes, etc.) are not yet appreciated by many investors.
  • Essentially, it’s a case of the trend being your friend, such that early signs of tomorrow’s big problems are drowned out by the euphoria.Above, you can see two of the recent quick stock collapses that made temporary headlines. On top is Boeing, which gave back half its gains of the past year in just a couple of weeks, following the tragic mechanical issues in one of its aircraft models. Below that chart is Facebook, which rose over 34% in under 5 months last year, then fell over 40% from that summer 2018 peak as a variety of privacy issues, growth concerns, and worries about government intervention piled on the stock price. Facebook “popped” back up, but still lies only about 4% above where it was a year ago.None of this is intended to opine on any individual stock or company. It is an observation about the way individual stock holdings of generally large, established, liquid-trading businesses are susceptible to the kinds of price swings that were (and are) more commonly associated with less-established businesses.Related: How About That 20%… er… 16% Rally In The S&P 500?


    I analyzed the daily price changes (including dividends) for all 30 stocks in the Dow Jones Industrial Average from the end of 2017 through March 11, 2019. Ironically, Boeing’s stock, which had already been falling, fell another 6% the next day, March 12, so it is not included in this analysis. However, it sure did serve as a reminder of the points I am making here. And while I have not gone deeper than the 30 Dow stocks at this stage, I will assume for now that when one looks outside the Dow at businesses that are on less solid ground, the susceptibility to big daily declines in price is even higher. I found that in the 298 trading days studied (about 14 ½ months), there were 125 times when a Dow stock fell at least 3.9%. There were many more in the 3.0%-3.9% range, but I felt that a cutoff just below 4% was a good snapshot to illustrate this issue.That works out to about 9 “incidents” per month in this set of 30 esteemed, established stocks that make up the Dow. So, if you owned a 30-stock portfolio of that sort, 9 times a month (about twice a week), you would see a pretty big drop in one of your holdings. Remember, this is still a market in which stock prices are not constantly under attack, and these are the large, liquid stocks, not the ones investors use to aggressively try to beat the market with.


    The outcome of all of this to me is that while individual stocks can play a central role in portfolios aiming for long-term growth of capital, their usefulness in other situations may be peaking for a while. Specifically, using individual stocks for dividend income is something I have cut way back on in my portfolios. It’s just not worth the added risk, when a year’s worth of dividend can be lost in the stock price in a day. There are too many other ways to pursue that income and growth objective without keeping a bottle of Zantac nearby whenever earnings season arrives.Think about what you truly aim to get out of your stock portfolio, and don’t be fooled (by yourself or anyone else) into thinking that individual stock investing is something other than what it is. This is a great time to take stock (pun intended) of where you are taking risk and confirming why you are taking it. I know I am.