Key insights
- A retail investor is considering a concentrated portfolio of AI, space, and renewable energy stocks, weighted by growth and profitability metrics. While acknowledging the initial 'hunch' based approach, the investor is attempting to systematize stock selection. The strategy carries significant risk due to sector concentration and potential over-diversification, but the investor's risk tolerance is elevated due to their current life circumstances. The impact on the broader US market is slightly negative, reflecting potential capital misallocation.
Hello all, I am a new investor looking for some advice on investing in individual stocks. Initially, I was focused on just investing in the S&P 500 through SWPPX, but a few individual stocks I bought seemed to do quite well, and I also have some FOMO around the AI, space, and renewable energy sectors. I plan to keep a Roth IRA with SWPPX and SWISX in it, but for my brokerage account I want to invest more in stocks that I am personally interested/confident in. (I will still keep investing some of it in SWPPX.). At this point in my life I feel like I am positioned to take more risk and be a bit more aggressive. (I am lucky to have found a good job, while being young and not having a bunch of living expenses right now)
I tried this for a bit, but then I realized I was mostly just investing in interesting stocks based on a hunch. So, I decided to take the three themes that seem to be performing well overall (AI, space, and renewable energy), then select about 40 stocks from those sectors and weight them using metrics available on Schwab to help prioritize them. I am primarily weighting stocks based on 5-year revenue growth, 1-year profit margin, return on equity (ROE), 1-year EPS growth, market capitalization, price-to-sales ratio, beta, and relative performance vs. the S&P 500. My plan now is to invest a certain amount in each stock based on the weight it receives.
My main questions are: Is this a stupid approach? It so, how do other people approach investing in individual stocks? How do you know if you are invested in too many stocks?