I reckon that picking individual stocks to invest in can be a lucrative pursuit but only if you are prepared to work hard at research and learning about investing strategy.
If you haven't got the time or inclination to put the hours into your investing, individual stock-picking can be dangerous and your hard-earned capital could erode alarmingly fast, perhaps even disappearing altogether.
Read on for my top tip on how to make sure individual stock picking is worth the effort.
Fortunes won and lost
The lure of stock-picking, of course, is that fortunes can be made if you latch on to an outperformer. For example, over the last two-and-a-half years AB Dynamics is up almost 270% and Boohoo.com has exploded 850% higher.
But get it wrong and you'll be postponing financial retirement rather than bringing it forward. Just look at Soco International, down 60% since 2015, and Bonmarche Holdings, collapsing by 70% over the same period. If you'd been clinging on to those shares you'd have been gutted and condemned to working longer to restore your capital.
Arguably, stock-picking is probably best avoided altogether if you are busy earning a living elsewhere with little free time available to devote to researching and monitoring your investments. That doesn't mean that busy folk should avoid investing altogetherboard, because history shows that the best gains of all asset classes can come from the stock market over time.
A strategy for investors short of time
Instead, if you are busy you may be better off considering some kind of collective investment vehicle such as low-cost index tracking funds or managed funds like those offered by successful fund managers like Neil Woodford and Mark Slater. Picking such funds would require some research time, but the decisions you make would last for longer and your investments could require less frequent monitoring.
One potential halfway house approach to individual stock picking is to use a directed stock-picking service such as those on offer here at The Motley Fool. Such services allow you to benefit from the upside potential of individual stock-picking while learning about investing research and strategy, and without having to spend hours researching the whole market for ideas.
Even the best investors only tend to call around 50% of their picks correctly, at least initially. So if you decide to pick individual shares, my top tip is that the greatest success comes to those who cut losing positions quickly and run their winning positions. Risk management is vital to ensure your success and that means cutting when you are wrong, in my opinion, despite what your fundamental research suggests. I think it's always worth remembering that the market has the final say on where a stock is going.
In summary, I reckon investing and stock-picking can be fulfilling, absorbing and lucrative, as long as you are prepared to work hard at it and keep learning.
10 more steps to take
Several tactics could propel you to making the magic million from shares on the London stock market.
This well-researched and useful report reveals 10 steps you can take right now to use shares to help you invest your way to a fortune. Read the report now and it can help you decide where to look for potentially life-changing shares on the London market and what to do when you find them. To download this report, click here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.