Archive for February, 2010
When people think of investing, they invariably think of stocks. But before you jump right into stick picking, realize that even though individual stocks might represent a terrific growth opportunity, they also carry a high level of risk, especially in the short term.
“I always thought that when investing online, there should be a box that asks you to identify your financial goal,” says a colleague. “It’s too easy to get on there and make an impulsive decision to buy a stock instead of thinking, ‘Is this stock going to get me where I want to go in five, ten, twenty years from now?”
That’s exactly the question you’ll want to ask yourself when you’re selecting stocks. Before you write that check or click that box on a website, make sure you understand how this purchase will fit into your overall plan. Once you’ve figured that out, it’s time to do your homework. First, make sure you understand the company’s basic business plan and are familiar with its financial condition. Some investors have been quite successful by buying the stocks of companies whose products they know and like. But that doesn’t give you a complete picture. You also have to research the company’s financial picture, its competition, the health of the industry in general— and how all of this affects the company’s future prospects.
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If you’re a long-term investor, buy-and-hold can be the easiest and most effective strategy. But about once a year you should reevaluate your funds and make sure that they are still the best choices for your portfolio. Where to start? Once again, by comparing your fund’s performance to its peers and to its relevant benchmarks. If your fund is down 10% for the year but similar funds are down 1 5%, that’s a good result. If your fund is up 10% and similar funds are up 15%, that’s not so good. Performance alone—without comparing it to a benchmark—is not a reason to sell.
In fact, if you do fall into this trap and sell on the basis of out- of-context performance alone, you could be missing the next upward trend. Frequently a particular style of fund will be down one year and up the next. Small-cap value stocks fell 1.5% in 1999; in 2000 they rose 23%. If you had sold your well-managed small- cap value fund at the end of 1999, you would have missed the boat. The bottom line? Consider selling a fund if it has performed worse than most of its relevant peers r benchmarks for the last year; if it has been a relative underperformer for two or three years, that’s a clear sell sign. If your fund ha been in the bottom quartile (it has performed worse than 75% of ts peers) for even a year, that’s also probably an indication to sell.
Second, consider selling whm a fund’s objective changes. If you bought a small-cap fund that is now gravitated toward large-cap equities, and you already own s many large-cap funds as you need, it’s probably time to look for a true small-cap fund. Similarly, if your small-cap funds have increased in value and are now a disproportionately large part of your oveall equity portfolio, you may want to sell some in favor of other fuels,
And finally, you should reevaluate your fund if it has a change in management. This is not a char indication to sell, but remember:
Your fund is only as strong as he person who is calling the shots.