It's never been easier to invest in stocks. However, not everyone should buy individual stocks, and retail stocks, in particular, may not be right for everyone. Here are three signs that you should avoid retail stocks.
- The investing mantra "buy what you know" is a guide for beginning your research; it doesn't mean "buy only the stores you shop."
- If you don't have the time to research stocks, you shouldn't buy retail stocks because you don't know how they perform.
- If you tend to sell off your stocks when the market drops, buying retail stocks may not be in your best interest.
You Only Buy Stocks in Your Favorite Stores
Sure, retail stock investing greats like Peter Lynch have encouraged investors to use a "buy what they know" strategy, but that advice has often been taken out of context. Lynch went out of his way to explain that using "buy what you know" was a starting point, before doing appropriate research on a stock. Too often, retail stock investors buy shares in their favorite stores simply because they like shopping there.
You absolutely should be using your own edge as a consumer to point you toward the stock of retailers that you, and therefore other consumers, shop at. But if you find yourself buying stocks in companies you like without doing any further research, stop. Further, if you do research but remain biased toward your favorite stores, even if the numbers don't back it up, it's a problem. Use "buy what you know" to identify the stocks you'll do research on, but you have to look at the numbers coldly and make an investment decision. If you can't do that, retail stock investing may not be for you.
You Don't Have Time to Research Individual Stocks
This one piggybacks off our last point, but if you can't devote the proper amount of time to research individual retail stocks (at least two hours a week), then you shouldn't be buying them. At the very least you should know the basic fundamentals (same-store sales, revenue growth, net operating income) and basic valuation multiples (P/E, PEG, P/S ratio) of the stocks you own. You should also know the latest news, earnings announcements, and product launches of every retail stock you own. You need to spend time analyzing the competition of your retail stock, and you need to look at your stock's profit margins and inventory levels over time to see if its competition is cutting into its business. If you can't do all of that, if you just don't have the time, then it's better to simply not buy retail stocks. We all have responsibilities and priorities; for some, researching retail stocks simply can't be one of them.
You Panic (Sell) When the Market Gets Volatile
Research has shown that the average individual investor underperforms the market by about 7.42%. The primary reason? We buy and sell stocks at the absolute worst times. That's right, most of us will be absolutely terrible investors because of when, not what, we buy.
So be honest with yourself. Do you think you would have the ability to hold on to your stocks if the market pulled back 15%? Further, what if the stocks you owned pulled back even further, say 30%? Because that's what happens with retail stocks; since retail is so directly tied to the consumer, retail stocks go higher than average in good times and they crash harder in bad times. Therefore, if you are inclined to panic sell in general, retail is possibly the worst sector for you to invest in.
You Can Still Win (Big)
The truth is it doesn't matter if you are a panic seller, or if you don't have time to research stocks. You can still beat the market by following a simple formula. Just buy index funds, don't sell them, and buy more when the market falls. Sure this plan will still require you to avoid panic selling, but it will be much easier to do so if you buy an index fund or exchange-traded fund (ETF) instead of retail stocks. Index funds own the entire market, they are vastly more diversified than individual stocks and offer much more safety.
Individual stock investing isn't for everyone. Some of us don't have time, and some of us can't stomach the wild price swings of individual stocks. That's ok, in fact, it's better to know that upfront than to blindly lose money in individual stocks.
When you consider the average investor loses to the market by 7.42%, simply buying an index fund can be a great strategy. Plus, if you buy more when the market dips, you can easily beat the market without ever buying a retail stock.