A:Funds are very popular with the majority of investors, but are
they giving their money's worth? Only if you pick the best of
the best. And also if the investor keeps the funds for the
long term and doesn't touch them unless something happens to
the fund that gives out a danger signal. We maintain the
position that most investors can outperform the professionals
with a diversified portfolio of common stocks, a little common
sense, and a lot of homework. But, you must commit the same
diligence to your securities portfolio as you would any other
endeavor.
1)Review
your portfolio. Most professional money managers claim that an
investor should review their portfolio once a year. The
average investor tends to buy and sell at the wrong times. The
solution would be to hold on for the long haul.
2)You
need a long term investment plan for retirement because social
security will not be enough, neither will pension plans.
Choose investments with a level of risk that makes you feel
comfortable and that are appropriate for your long term goals.
3)There
is a wealth generating power of stocks. It has been proven
over time that stocks have been the winner over anything else.
Bonds and cash are used as a safe guard for most people, but
they do not grow and only pay interest.
4)You
need patience and discipline to hold onto or add investments
through down markets as well as up markets.
5)Remember
to create a broadly diverse portfolio spreading risk over a
variety of investments with asset allocation and mutual funds.
6)Do
not stop investing when you retire. You do not have to shift
all your stock or stock funds into fixed-income investments or
even money market funds.
7)A
balanced portfolio is still the better way. If you are over 65
years old, you should have at least 60% in stocks and or stock
mutual funds. Remember, you still have a lot of great years
left ahead of you to enjoy life.
A:Asset
allocation, or spreading your investments across asset
classes (stocks, bonds and money markets), is a great first
step in diversifying, but it shouldn't end with that. The next
step is to diversify within each asset class. Stocks, in
particular, hold many opportunities to mix different types and
styles to help ensure that you're always invested in at least
one area of the market that may be enjoying an upswing.
Q:What
does "investment style" mean? A:This generally refers to two types of stock: growth or value.
A growth stock is one whose earnings potential is considered
above average, based on such factors as earnings history and
competitive position in its industry. A value stock is one
that is considered under-priced—or, quite simply, a
bargain—given its company's fundamental strengths. Many
stock mutual funds are referred to as growth or value funds,
and investment professionals consider such styles to have
different cycles. Growth stocks, for instance, tend to lead
other stocks when the market and economy are strong. Value
stocks, on the other hand, are favored when the market is in a
slump and good stocks may be under-priced because many
investors aren't buying or "bidding up" stocks.
Holding both value and growth stock funds allows you to
participate in each market cycle.
Q:What
is a market capitalization? A:Another way to diversify your stock holdings is to invest in
funds that focus on companies of a particular size. Size in
the stock market is measured by market capitalization (often
referred to as market cap), which is the total market value of
a company's issued and outstanding stock. Large cap funds tend
to hold the stock of well-known companies, such as IBM or
Coca-Cola. Conversely, small cap funds are likely to invest in
more obscure companies serving a market niche not often
visible to the consumer.
Smaller cap stocks may offer the potential for greater
long-term results. However, they are also generally associated
with a higher risk of failure because small companies are
sometimes under-funded and may not be well-established in the
marketplace. As a result, small cap stocks tend to enjoy favor
when the economy is strong and smaller companies are less
likely to struggle financially. On the other hand, large cap
stocks may be favored when the economy and market are in a
downturn, because larger companies are perceived as more able
to weather difficult times than their smaller counterparts.
Diversifying your savings by holding various types of stock
funds keeps you invested opportunistically as the market
cycles up and down. Growth stock funds versus value, large cap
funds versus small all may offer potential at one time or
another during a long-term investment horizon.
Q:How
do I build a diversified portfolio? A:Mix it up! It's wise to hold a variety of stock types to ensure your
portfolio is well-diversified. A
diversified portfolio does not concentrate in one or two
investment categories. Instead, it includes some investments
whose returns zig while the returns of other investments zag.
The net effect is lower volatility in returns.
Large cap stock:
Stock of a large
company with a market capitalization (total market
value of issued and outstanding stock) generally over
$10 billion.
Mid cap stock:
Stock of a
mid-size company with a market capitalization
generally between $2.5 billionand $10 billion.
Small cap stock:
Stock of a small
company with a market capitalization generally under
$2.5 billion.
Value stock:
Stock trading at a
discount to its perceived true market value.
Growth stock:
Stock of a
company that has historically experienced
above-average earnings growth rates.
A:
A stock split is an increase in a corporation's number of
outstanding shares of stock without any change in the
shareholder's equity or the aggregate market value at the time
of the split. The share price and dividends per share are
adjusted proportionately.
But
what does that mean to you? After all, theoretically a split
is a "non-event." This means that, unlike most other
firm-specific "events," there is no change in the
cash flows of the firm or in the relative strengths of the
various interested parties of the firm. Since no real change
has occurred within the firm, you would think that the stock
market would show little reaction to a stock split
announcement. Yet research shows that the market does indeed
react directly to a split.
It
is obvious that, unless the splits or dividends make the
shares more desirable, they represent nothing but paper
shuffling for which the corporation must pay. The usual
argument for splits is that investors prefer stocks of
companies that trade within some common range, such as $20 to
$100. With the company's price in a more accessible range, the
theory goes, more investors should flock to the stock, bidding
up its price. Furthermore, many companies would argue that by
allowing more shareholders to purchase and sell shares in
round lots, transaction costs would go down.
Research
studies indicate, however, that transaction costs increase
after splits. These costs include both commissions and the
bid-ask spread, which is the difference between the price you
have to pay to buy the stock and the price you can receive
when selling the stock. Commissions per share of stock would
typically decrease after a split, but not enough to compensate
for the additional shares that need to be sold or purchased to
meet the previous dollar amount of the complete transaction.
One would expect the spread, when measured
as a percentage of price, to remain the same before and after
a split. In reality, the spread usually widens, increasing
transaction costs. This is mainly attributed to a
proportionate decrease in trading volume after most splits.
A:
A reverse split is a decrease in a corporation's number of
outstanding shares of stock without any change in the
shareholder's equity or the aggregate market value at the time
of the split. The share price and dividends per share are
adjusted proportionately.
A
reverse split will decrease the number of outstanding shares.
A 1-for-5 split would leave an investor with one share of a
company stock for every five owned, boosting the share price
by a factor of five. Stock distributions in the form of
dividends or splits would be used for stocks priced too high,
while reverse splits would be used for low-priced stocks.
Reverse
splits have interesting consequences for the stock price. In
these instances, studies have found substantial negative price
performance when the announcement is made, approved and
executed. In a large number of cases, the stock price
continued to decline even in the long run. Reverse splits
often occur when a company trading over-the-counter with a low
priced stock is trying to meet the listing requirements of
exchanges, which typically carry minimum price requirements.
A:
A cash dividend is cash payment to a corporation's
shareholders, distributed from current earnings or accumulated
profits.
An
announcement of cash dividends would intuitively seem to have
some impact on a stock's return. To move a stock's price,
however, the amount of the dividend or the nature of the
dividend must be a surprise.
Dividends
are the only cash payments that are regularly distributed by
corporations to their shareholders. The board of directors
decides upon the dividend, which is declared and distributed
quarterly. The dividend can be of almost any amount and
shareholders have no guarantee of dividend payments. However,
dividend policies tend to be one of the more stable and
predictable elements of a company. Decreasing or eliminating a
dividend is tantamount to an announcement that the firm is
financially distressed. Directors weigh dividend policies very
carefully, rarely lowering dividends unless they have to, and
not raising dividends unless they are confident that they can
be sustained. When a company announces a larger than expected
dividend or unexpectedly announces a dividend cut or omission,
the market reaction is dramatic and sudden. Studies indicate
that stock prices typically change to reflect dividend policy
changes within the trading day of the announcement. With
market reaction this quick, it is difficult, if not impossible
for investors to make extra money after the announcement has
been made. The only way for an individual to take advantage of
a positive or negative surprise dividend announcement is to be
positioned prior to the announcement.
A:
In order to receive a declared dividend, a shareholder must be
on the company's shareholder list on the holder-of-record
date. The ex-dividend date is four days prior to the record
date. Therefore, any shares purchased prior to the ex-dividend
date are entitled to the dividend, while any shares purchased
on or after the ex-dividend date are not.
On
the ex-dividend date, you would expect the price of the stock
to fall by the amount of the dividend. Several research
reports reveal, however, that on the ex-dividend date prices
tend to fall slightly less than the dividend payment would
dictate. While transaction costs and taxes would wipe out this
excess return for most individual investors pursuing just this
dividend capture strategy, if you are planning to transact in
a stock and it is very near the ex-dividend date, then you
might consider selling on the ex-date or buying it just prior
to the ex-date. Stock dividends are distributions of
additional shares of stock to shareholders instead of cash.
For an investor holding 100 shares of stock, a 5% stock
dividend would entitle the investor to another five shares of
stock. If the stock were selling at $100, after the stock
dividend it will open at about 95 1/4, making the market value
(price times number of shares) the same before and after the
stock dividend.
A:
A stock dividend is the payment of a corporate dividend in the
form of stock rather than cash. It is usually expressed as a
percentage of the shares held by a shareholder, and is 25% or
less than the total number of shares outstanding. The share
price and dividends per share are adjusted proportionately.
When
stock dividends are over 25%, they are typically called
splits. If the same stock had a 2-for-1 stock split instead of
a stock dividend, the investor would have 200 shares of stock
but they would be trading at $50—half their previous price.
Prices
will typically rise prior to a stock dividend announcement;
after the announcement there will be little or no further
increase in price. Generally, stock dividends create a
positive impact on prices in cases where there is an increase
in the cash dividend along with stock dividend.
A:
A price increase in and of itself is no reason to dump a
stock. On the other hand, you should also be analyzing your
individual holdings in the context of your total portfolio.
Your portfolio should always be diversified; if you own more
than 10 stocks in equal weights that are in various
industries, or you have holdings in diversified mutual funds,
you can consider yourself diversified. If a stock holding has
become a large percentage of your total portfolio holdings due
to good price performance, causing an over-concentration in a
sector or industry, you may want to consider paring back the
position, taking some profits and redistributing the wealth.
But don't unload a stock just because you have already made
money on it. Always consider the future merits of a stock
before you sell due to a price movement—use the same
analysis that led you to buy the stock originally, and
reassess based on current market conditions and price levels.
If the outlook still looks good, keep the stock, but pare it
back.
A:
It depends on the company: Does one person rule or can the
company thrive under management changes?
Management
changes may signal the need for another analysis of the
company and should not automatically trigger a sell unless the
company is ruled by one personality or it is so small that the
only pool of talent is the individual who has left. This
one-person show is often the case in start-up ventures and the
smallest companies that started out as entrepreneur ventures.
Rarely does the management of a multi-national company stand
alone, without capable underlings who can step in and continue
or expand the present businesses. As part of any investment
analysis, you should familiarize yourself with the pool of
management talent and their tenure at a company. This
information is available in the company's 10-K proxy and
statement.
A:
While the downgrade a stock may cause a price drop
temporarily, you need to analyze why the analysts changed
their mind. Wall Street brokerage firms employ thousands of
analysts and research personnel to issue "expert"
opinions on the stocks that they are following. Become your
own analyst and examine what caused the change. Did they meet
with management? Conversations with management by an analyst
may have merely resulted in a changed impression rather than
any real change in financial data. Were new earnings released?
This is public information that you can analyze by examining
the company's 10-Q statement. Are sales and earnings
declining? Are margins shrinking? Is competition increasing
along with inventories? Only after you have examined these and
other factors yourself should you decide to sell a stock.
Don't simply take a broker's recommendation; your own analysis
will mean more in the long run.
A:
For an investor in common stock, knowledge of expected
earnings, changes in expected earnings, and actual earnings is
crucial for understanding stock price behavior. Earnings
surprise is the key. Positive earnings surprises occur when
actual reported earnings are significantly above earnings per
share forecasts; negative earnings surprises occur when
reported earnings are significantly below earnings per share
forecasts. Both have lingering long-term effects.
Consequently,
a very rewarding investment strategy is one that avoids stocks
you believe will have negative earnings surprises or that have
had negative earnings surprises. Selecting positive earnings
surprise stocks before and even after the earnings come in may
be similarly profitable. Even a strategy of simply selling
after negative earnings surprises and buying after positive
earnings surprises probably has some merit.
A:
Three factors are important in looking at earnings estimates:
The
earnings per share forecast;
The
level of agreement among analysts following the company on
expected earnings; and
Any
significant revisions in estimates.
All
of these earnings estimate factors are embedded in current
stock prices, and revisions in earnings forecasts will affect
stock prices immediately, as will any significant surprise in
actual versus expected earnings. As would be expected, more
distant forecasts have greater variability, less consensus,
and have fewer analysts making estimates.
There
are potential rewards for disagreeing with the consensus and
being correct. The trap that investors often fall into is
that, upon hearing robust forecasts of earnings sung by a
choir of analysts, they purchase the stock and are
disappointed as the stock fails to soar when the consensus
proves correct. Why did the stock fail to soar? Because its
price already reflected the consensus viewpoint.
A
few points on earnings estimates worth keeping in mind:
Know
the earnings forecast consensus of a stock you own or are
interested in.
Realize
that the stock price already reflects the general
consensus about future earnings.
Be
aware that if a stock is highly touted, the basis for the
recommendation should be an earnings forecast
significantly above the prevailing opinion.
Ask
for and carefully evaluate the foundation of an earnings
forecast that deviates substantially from the consensus
before investing.
Be
sensitive to revisions in forecasts and monitor actual
quarterly earnings relative to forecasted earnings.
Significant
earnings surprises, positive or negative, probably have a
fairly long-term effect on a stock's price as analysts
revise long-term earnings forecasts accordingly.
Don't
expect extraordinary gains (gains beyond market returns)
if you agree with the earnings consensus.
Stocks
that are followed by fewer analysts and with fewer
estimates will provide more opportunity for you to benefit
from your research efforts.
Many investing Web sites
report earnings estimates and earnings surprises and Yahoo!
Finance is one of the best.
A:
Earnings are announced for quarters based on the firm's fiscal
year. As the fiscal year-end approaches, fiscal-year consensus
estimates converge toward the actual fiscal-year earnings and
there is less divergence. However, the focus does not abruptly
shift to the next fiscal year as the previous one ends.
Instead, stock prices probably, but not precisely, incorporate
a rolling four-quarter earnings forecast perspective. Earnings
forecasts are a moving target.
Also,
analysts change their forecasts in reaction to a changing
firm, industry, and economic environment. New information
drives analysts' expectations and stock prices. Following the
trend of changes in analysts' earnings forecasts for a firm
and determining the root causes of those changes should prove
valuable.
If
you are unsure of why earnings forecasts are changing, it is
not a bad idea to simply call the firm itself and ask for the
investor relations department. They will tell you about all
the information the company has released or any public
information they are aware of that has been published.
