Stacy Francis, CFP®, CDFA
People often ask me, “Should I buy this stock I heard about?” A good planner’s honest answer is usually: “I don’t know.” Whether buying a particular stock is a good idea depends on:
- Is it the only stock you’ll own or one of many?
- How diversified is your portfolio already?
- How much money do you have invested overall?
- What are your goals and your time horizon?
In some years, the market may rise overall, but most individual stocks will still be down. For example, in the late 1990s, the S&P 500 rose significantly thanks to a handful of strong performers, while over 400 stocks in the index actually declined. In 2008, most of the stock market fell sharply, regardless of individual company quality.
One major advantage of a mutual fund or ETF is that it can hold far more stocks than you could realistically buy on your own. That makes it easier to achieve broad diversification and reduces the impact of one “wrong” pick.
For many investors, it makes sense to leave stock picking to professionals and use diversified funds as the main building blocks of the portfolio.
If you do venture into individual stocks, here are some of he key principles to keep in mind.
Before you buy: make sure you like your reason
A smart stock pick starts with an honest question: why am I buying this? Good reasons tend to be grounded in reality, like believing in a company’s business model, sharing the company’s values, or seeing how economic conditions could support that business.
Not-so-great reasons are usually emotional or superficial: chasing last year’s “best performer,” or buying simply because a stock looks “cheap.” Price alone doesn’t tell you whether something is a bargain or a trap. If a fund or stock has done great over the past year, suddenly everyone wants it because it’s “the best one.” The chances you will overpay are high. Similarly, don’t buy something just because the price is low, you may end up learning the hard way why.
Savvy gut-check: If you’d feel embarrassed explaining your reason out loud, pause and do more homework.
READ: How to Start Investing in the Stock Market by Ann Wilson
Understand what you own (or hire someone who does)
Some businesses are straightforward. Others, especially in tech, biotech, and complex services, are hard to evaluate from the outside. The risk isn’t just “getting it wrong”; it’s that when you don’t truly understand a business, it becomes much harder to stay calm and make rational decisions when prices swing.
If you’re venturing into an industry you don’t fully grasp, reduce risk by getting help—a trusted advisor, a research-driven approach, or a diversified fund that outsources security selection.
A scan before you buy any stock (or fund)
5 things to look up before you buy
Before you buy a stock or fund, run this quick checklist:
- Essence. What does the company (or companies, in case of a fund) do? My general advice is that if you don’t understand the business, you shouldn’t bet your money on it. To stomach the ups and downs in the markets (especially today), you have to feel good about your investment.
- Sales. Are whatever products and/or services the company produces actually selling? If they are gathering dust in a warehouse, chances are your money will, too.
- Cost discipline. Are leaders using capital responsibly? A $10,000,000 golf retreat for the executive staff is hardly effective use of your capital. Put it to work elsewhere.
- Debt. People aren’t the only ones who suffer when overwhelmed with debt. Find the leverage ratio (calculated as total assets divided by shareholder equity) for the company (or companies) you’re considering. If it is higher than 5, reconsider.
- Bad news. Nothing spreads faster than bad news. If there’s anything fishy going on, chances are someone picked up on it. Look for credible reporting, regulatory issues, lawsuits, accounting concerns, or repeated red flags.
Fundamental vs. technical analysis for individual stocks
It helps to understand two different methods of evaluating securities: fundamental and technical analysis.
Fundamental analysis
This approach looks at the actual financial health and value of a company.
Consider this real-world-type example: a client raves about an “exceptional” new stock. It has already tripled since going public, and all the charts look amazing. The company is in the mining industry and has one early-stage project that, if everything goes perfectly, could generate $3.5 million in cash flow.
But the stock market is valuing the entire company at $40 million—more than ten times what its assets are realistically worth.
From a fundamental analysis perspective, this looks absurd:
- A fundamental investor compares the company’s book value (what its assets are worth) to its market price.
- Companies trading well below the value of their assets can be attractive buys.
- Companies trading far above that value can be red flags.
On the other hand, someone using technical analysis (focusing on price patterns and charts) might still buy, believing the trend will continue.
Technical analysis
The counterpart of fundamental stock analysis is technical analysis.
According to technical analysis, value is truly in the eyes of the beholder. Rather than paying attention to the book value of a company, technical investors define a company’s worth as whatever people are willing to pay for it.
Technical investors therefore spend as much time analyzing charts as fundamental investors do perusing balance sheets and income statements. According to technical analysis, stock prices tend to follow certain patterns — some long term and others shorter term. The price for a certain stock can be in a short-term upward trend even while in a downward trend overall. So if the charts look right, a stock trading for ten times its market cap may very well be a good buy.
WATCH: Stock Market 101 and Bond Market 101 Webinars with Iseult Conlin, CFA
Which one works best?
It is impossible to say which out of the two works the best. There are investors who make billions using either, and investors who lose everything they own and then some.
What I can say, though, is that the problem with either type of analysis is that they assume investors think and act rationally. If a company’s assets are worth a certain amount, fundamental investors trust that’s where the price is eventually going to settle. Similarly, if the price of a stock breaks through a certain resistance point, technical investors almost take for granted that it is going to climb for a while.
The problem here is that — as you know — most people are not rational, especially in the stock market. It is therefore extremely difficult to predict their behavior; what makes them buy or sell a stock and when. So while both techniques bring valuable information to the table, it is important not to take them too literally.
Give the little guy a chance: where small-cap stocks fit
Large “household-name” companies get most of the attention—but small-cap stocks can play a role in long-term growth inside a diversified portfolio. A practical approach is to keep small caps as a modest slice of the portfolio (often cited as roughly 10%–15%) because they tend to swing more than large-company stocks. 
Bottom line: Small caps can help diversify return sources, but they’re not a “go all in” category. Balance potential upside with volatility.
Finding investing opportunities
If you’re working 40+ hours each week (and many women work much more between jobs, caregiving, and household responsibilities), the last thing you want is for your hard-earned dollars to sit idle and slowly lose value.
Some savvy guidelines when looking for investing opportunities:
- Don’t buy into what’s obviously overpriced. Not all cheap stocks are bargains, but chasing something that’s doubled or tripled just because “everyone else is buying” is risky. Look at the fundamentals or have a professional you trust do it for you.
- Invest in the future you actually believe in. Believe electric cars are the future and certain traditional industries are in decline? Consider investing accordingly. Avoid companies you think are “over the hill.” Focus instead on sectors and businesses with solid prospects.
- Look for “perpetual income” opportunities. Some businesses (like certain infrastructure, utilities, or energy assets) can potentially generate cash flow for a long time from a one-time investment. These aren’t risk-free, but they can be powerful building blocks in a long-term portfolio.
No matter the market conditions, creative investors (working alone or with a skilled advisor) can find opportunities.
WATCH: How to Generate Monthly Income from Investing with Laurie Itkin, CDFA
Aligning investments with your values
Your values are a core part of who you are. Many of us work hard to “live our values” in daily life, but our investments may not always reflect that. When you buy a company’s stock or bond, you are, in a real way, supporting its business model. It’s natural to ask: Do I support what this company stands for and how it makes money?
The good news: values-aligned investing options have grown tremendously. There are ethical, sustainable, and socially responsible funds that aim to make competitive returns, avoid or minimize exposure to companies that conflict with certain values and invest in companies working on solutions you care about.
Whether your passions are environmental sustainability, human rights and fair labor, community development or corporate governance and transparency, chances are, there are investments that align with your priorities.
However, values-driven areas can get crowded quickly. For example, when interest in “green energy” surges, many companies may spring up—some strong, some weak, some kept afloat mainly by subsidies or hype.
That’s where a knowledgeable advisor or well-researched funds can help you identify companies or funds with real expertise and solid projects, avoid those riding short-lived trends and balance impact with risk and return.
By supporting stronger businesses in the spaces you care about, you increase your chances of solid returns, and help direct capital toward the change you want to see in the world.
Learn more about investing on our Savvy Investing Guide.
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