Here’s What Happens When You Randomly Choose Your Stocks

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It’s important to have a strategy for buying stocks. Read on to learn more. 

Investing in stocks is a great way to grow wealth. But it’s important to have a strategy for loading up your portfolio. And if you decide to choose your stock purchases at random, you might end up losing money or stunting your portfolio’s growth.

The problem with randomly picking your stocks

Any stock that gets added to your portfolio should be one that you’ve thoroughly vetted. You’ll want to make sure that any company you’re investing in is in good standing financially — meaning it’s managing its money well, has decent cash flow, and isn’t overloaded with debt.

It’s also a good idea to look at a company’s management team. See what experience they have and what wins they’ve had in the past.

And also, look at growth potential. A company that lacks innovation may not end up seeing its share price rise over time. But a company that’s constantly introducing new ideas may be nicely poised for growth.

Along these lines, you may want to aim for companies that have a clear advantage over their competitors. That could be their ability to leverage technology or simply come up with creative approaches to otherwise tough challenges.

Now, as you might imagine, it can take time to vet a stock thoroughly. But if you don’t take that step, and you instead just choose your stocks at random, you might end up investing in companies that don’t serve you well and don’t make you any money.

Also, it’s important to choose stocks that lend to a nice amount of diversity in your brokerage account. So to that end, you don’t want to randomly choose your stocks, because you might end up too heavily invested in a given market sector. That means you run the risk of excessive losses if that particular segment of the market happens to take a hit.

Make sure you have a plan

Randomly choosing stocks to invest in could mean not meeting your financial goals. So if you’re not willing to put in the time to establish a strategy and vet each stock individually, you may instead want to plan on investing in broad market ETFs. Buying up shares of an S&P 500 ETF, for example, could make it so your portfolio is nicely diversified without you having to do a lot of work.

Of course, this isn’t to say that randomly choosing stocks will never work out well. Years back, an experiment was conducted that pitted seasoned investors against a cat in a stock-picking competition. The investors used their knowledge and expertise to assemble a portfolio, while the cat chose its stocks by throwing its beloved mouse toy at a grid. In the end, the cat’s picks yielded better results. Go figure.

But generally speaking, choosing stocks at random — or having your pet do it for you — isn’t a great bet. So if you’re not able or willing to put in the time to put thought and research into your stocks, you may want to fall back on ETFs instead.

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