In the classic Greek story of The Odyssey, the hero Odysseus tries to guide his ship full of men safely back home after the Trojan war. One of the hazards they encounter along the way are the sirens. These creatures, part woman and part bird, had such beautiful singing voices they could lure men to sail their ships onto the rocks and die.
The sirens’ song was said to be irresistible, so Odysseus cleverly had his men stuff wax in their ears, which allowed them to completely ignore the deadly singing and safely pass by.1
The siren’s song has since become a metaphor for something that is extremely enticing, but in the end leaves the person who pursues it much worse off.
In the financial world, the idea of making money by investing in single stocks seems to hold this allure.
The anecdotal success stories are endless—people who bought Nike in the 1980s, Intel in the 90s, or Apple in the mid-2000s (right before they introduced the iPhone).
Additionally, trading individual stocks just sounds like the American thing to do. You roll up your sleeves, open up a trading page, and invest in those companies your common sense tells you are going to succeed. It gives you such a great feeling of control.
Recently, the Robinhood “free” stock trading app, which has been advertising heavily on popular podcasts, has taken this idea a step further. They tout their up-to-the-minute information that enables you to “never miss the right opportunity to buy.”
And their name suggests that you’ll be robbing the rich (Wall Street types) to give to the poor (yourself). Turns out convincing you to buy and sell is beneficial for the company suggesting you should use their platform. Investopedia has a good article explaining how the Robinhood platform makes its money through trading fees.2 As usual, there’s no such thing as a free lunch.
Perhaps the biggest downside to do-it-yourself trading in individual stocks isn’t necessarily expense; you can find a cheap way to do all sorts of imprudent things. It’s probably not even bad timing, though that can cost you dearly. It’s the fact that if you have your entire retirement savings tied up in such few stocks, the concentration increases the risk of substantial losses.
This kind of risk can be so devastating, there have been recent changes in federal law to discourage it. And a spate of lawsuits have also helped convince many employers to reduce or eliminate the practice.3
Because you don’t know the future, as a prudent investor you must plan as much as possible for all eventualities, including a sustained drop in the value of your stocks. This is achieved by a strategic, global diversification of your assets in investments that tend to move counter to one another.
On the other hand, owning just a few stocks is living on the hope that the downside scenario, which happens every day to many seemingly “solid” stocks, for some reason won’t happen to you.
In our ancient story, Odysseus wanted to hear the sirens’ song, so he had his men tie him to the mast. When the singing made him want to jump overboard, they just tightened the ropes.
While your trusted advisor won’t physically restrain you, he or she is there to help you ignore the siren songs of picking winners, timing the market, and in times of volatility “just doing something.” They’ll help you stick with the unique long-term plan designed to give you the best chance of pursuing your ideal outcomes for investing and retirement savings.
Citations:
1 – https://en.wikipedia.org/wiki/Odyssey
2 – https://www.investopedia.com/articles/active-trading/020515/how-robinhood-makes-money.asp
3 – https://www.reuters.com/article/us-column-miller-employerstock/column-beyond-ge-u-s-workers-own-too-much-company-stock-in-retirement-plans-idUSKBN1K234Z
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