It’s necessary to take risks in order to gain higher returns, and that risk will expose investors to losses from time to time. But some investors are losing more than they can afford in this era of volatility, and an opinion piece in Bloombergasks whether retail investors should be allowed to own individual stocks at all.
Guardrails and restrictions are put up to protect many aspects of American life, but when it comes to individual stock investments, there’s no limit on the amount of risk an investor can take on—and investors are often encouraged to take on more risk than may be necessary. And while risk is necessary to grow wealth in your portfolio, it’s better to avoid idiosyncratic risk (betting on a single stock) rather than focusing on systemic risk (betting on the market as a whole). One inexpensive way to do that is to buy an index fund that holds hundreds or thousands of stocks; those funds tend to outperform hand-picked stock portfolios.
Stock ownership should be encouraged, the article contends; with only 50% of Americans owning stock, that’s widening the wealth inequality gap. However, retail investors should only devote a small share of their portfolio to individual stocks, almost like entertainment rather than an investing strategy. But because people can’t always be counted on to act in their best interests, the article puts forth 3 options that the government could enact in order to help investors:
- Only allow people with high net worths and hedge funds to purchase individual stocks. The problem with this option is it would be detrimental for society in contributing to wealth inequality.
- Make it a little bit harder to own individual stocks than it is now. Putting up hoops such as the expensive default options and warnings that exist in 401(k)s could go a long way in educating investors about potential risk.
- Allow individual trading to become even easier via various apps and platforms, and let the chips fall where they may. This is basically where we are now, and it’s likely that it’s the way things will continue. But perhaps more regulation via Option #2 could bring more prosperity to more Americans in the current market.