It’s tempting to be sure. With Thursday’s sell-off in response to weak revenue guidance for the quarter now underway, Cisco Systems (NASDAQ: CSCO) shares are now down more than 30% for the year. Yes, the company says it’s running into a headwind, but the stock’s pullback arguably already reflects this. Cisco may also be sandbagging expectations, just so it knows it won’t fall short of estimates when it posts fiscal fourth-quarter results three months from now. This is still Cisco, after all. Supply chain problems or not, it’s a premier name within the networking arena.
Before you dive into this beaten-down Dow Jones Industrial Average (DJINDICES: ^DJI) stock, though, there’s an alternative worth considering.
Investor, or thrill-seeker?
It’s the age-old question that never really gets answered: Do I risk betting all my available, idle cash on one stock that might pay off in a big way? Or do I hedge my bet and buy a basket of stocks, limiting my downside but also limiting my upside? In this case the single stock is obviously Cisco, while the alternative basket would be a fund like the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA), which includes Cisco as one of its 30 holdings.
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The answer is (as always): It depends.
Chief among these dependencies is the makeup of the rest of your portfolio. If you’ve only got a handful of individual stocks — perhaps mostly from the technology sector — you’re neither diversified nor shielded from extreme volatility. A Dow-based investment is almost certainly your next best move.
If, on the other hand, at least half of your long-term portfolio is already committed to an index fund like the SPDR Dow Jones Industrial Average ETF Trust and adding a new tech name to the mix wouldn’t overweight your exposure to the sector, Cisco Systems is perhaps a worthy speculation. Most investors tend to be somewhere in between those two extremes, making the question a particularly complicated one.
If the answer isn’t clear, then the better course is seeking safety in numbers by buying a basket of stocks.
Disappointed? There’s no denying that indexing rates pretty low on the excitement scale. You don’t invest for entertainment, however. Your first goal as an investor is maximizing your gain at the lowest possible risk, even if that sounds a bit boring.
There’s a curious set of statistics that might help you look past indexing’s lack of pizzazz, though. See, most people — not even the professional stock pickers — don’t do all that well picking stocks. Standard & Poor’s keeps tabs on the performance of all mutual funds offered to U.S. investors. For 2021, the research and analytics outfit found that nearly 80% of these funds underperformed the S&P Composite 1500.
Here’s an even stranger statistic: While you’d think picking individual large-cap growth stocks like Cisco would be the easiest way to beat a benchmark, it’s proving the hardest. More than 98% of growth stock funds underperformed the S&P 500 Growth Index last year. Perhaps worse, giving these fund managers more time doesn’t help improve their results. For the past 20 years, more than 95% of actively managed domestic mutual funds have failed to keep pace with their most meaningful benchmark.
Resist bargain prices just for the bargain
None of this is to suggest owning individual stocks is a recipe for poor performance. There are people (professionals as well as amateurs) who do beat the market with portfolios mostly consisting of stocks rather than index funds.
These people are few and far between, though, and they’re able to resist the timing temptations that we’re discussing now. Cisco may well be near a major low following its temporarily dialed-back guidance, but the fact is, nobody really knows if it is or it isn’t. Yes, a company’s value comes through in the long run, but the short run can throw nightmarishly confusing curveballs at us. The best way to win the trade-timing game is not to play it at all.
Or think about it like this… if you weren’t interested in owning Cisco five months ago because you’re just not a fan or follower of its networking business, the stock’s slide since then doesn’t actually change anything about that networking business. Even if and when shares recover, do you truly want to own a piece of the slow-growth company for the long haul?
If the answer is no, the stock’s still not worth stepping into at this newly lowered price.
Make things easy on yourself. Steer clear of these timing traps that will eventually ensnare. Use index funds to build a foundation for your portfolio. Add stocks to it only because that underlying company is built to last, and not just because its stock is cheap.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems. The Motley Fool has a disclosure policy.