The Portfolio Management Guide
Thursday, February 01, 2001
As the value of our Investment Club increases in value, we need to keep in mind that we can’t keep all the stocks that we have acquire each year. An Investment club should review its portfolio at least once a year to make sure that each stock has a potential of being productive and beneficial to the club’s interest for the next 5 years. Also the Investment Club keeps stocks that are diversified both in Industry and by size of company.
Diversify
The club should have diversified stocks to reduce risk since for most investors it means to buy stocks in a range of different industries. The club should set up its portfolio management program so that each member can review at least one stock on an ongoing basis so that all stocks are covered. The portfolio should be reviewed as a whole at least once a year to make sure that it is diversified, size diversification, and that that each stock has the ability to double or reach the goals by the next market peak. There is a happy medium between over-diversification (buying a different stock each month for three years) and under-diversification. A portfolio in which eight to ten different industries are represented is adequately diversified provided each industry carries roughly similar market value weighting. The club should know its limits, so that it only holds as many
Stocks as it can closely watch. It is very useful to use the Stock Selection Guide, since it helps to determine the selling zone for a stock. A comparison of current price with established zones allows the club to know when is the best time to buy or sell a stock. Growth rates of sales, earnings per share, pre-tax profits and other fundamentals can be determined using the front of the NAIC Stock Selection Guide. Portfolio management must determine whether growth is continuing if the investor's original expectations are to be realized.
Price/Earnings Judgment Factors
In using P/E (Price / Earnings) ratios it is important to understand that these figures should be analyzed carefully because these rations move up and down just like stock prices. In reviewing the stock it is important also to know where the company is in the cycle the economy and market are at that time to estimate where they will be at the end of 5 years. The P/E will vary in each company for various reasons:
· When there are long periods of severely depressed prices and very low stock market optimism, the P/E ratios may fall
· The higher the rate of sales and earnings per share growth rate, the higher the P/E ratios the company will command in the market
· The length of time over which a company has maintained a good growth rate will also affect its P/E ratio.
· Company that has a high-quality management, a special product, or market advantage will have a higher rate that its competitors.
Stay in the Market
It is always good to be consistent since getting in and out of the stock market is very risky. Some studies have shown that it is more productive for investors to keep good-quality stocks instead of changing from one group of stocks to another. A reason that discourages us to be a “switcher” is that when the market changes directions and starts up, the upward movement takes place so quickly that we may miss the opportunity to be successful. Keep the eye on the goal!