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Course 302
How to Monitor Your Portfolio, Part 2

Introduction

With cable financial-news programs, stock newsletters and tip sheets, and investment Web sites, you'd think that investors watch their stock portfolios 24 hours a day, seven days a week.

Such mega-monitoring would be overkill. True, stocks require more attention than mutual funds do. And in a volatile market, changes can happen quickly. Still, the managing of your stock portfolio comes down to making sure your stocks continue to meet your investment criteria. 

Here's how to monitor your stock portfolio without turning it into a full-time job.

How to Review the Fundamentals of Your Stocks

Just as you watch for unexpected changes in your mutual funds, watch even more closely for changes in your companies. Because mutual funds are collections of stocks, changes happen more slowly. But with individual stocks, things can shift quickly. You'll need to monitor your stocks more closely and frequently than you monitor your mutual funds.

You want your stocks to meet the same investment criteria today as they did when you first bought them. You set out your investment criteria in your Investment Policy Statement, and you should hold your stocks to those criteria. If they no longer meet your criteria, do they still belong in your portfolio?

If you haven't developed your investment criteria or created your Investment Policy Statement, review Portfolio 108 and download Morningstar's Investment Policy Statement Worksheet at http://news.morningstar.com/pdfs/Investment_Policy_Worksheet.pdf. (Note: The worksheet is available as a PDF file. You will need Adobe® Acrobat® Reader to view and print it.) 

Just because an investment no longer meets one of your criteria is no reason to sell it. But you should put it on your "to watch" list. And if a stock no longer clears most of your hurdles, it is a sell candidate. (We'll talk more about selling in upcoming courses.)

You can monitor your portfolio with e-mail alerts, such as those offered by Morningstar.com. Such alerts will notify you when there's news about your stocks, if there's a dividend paid or earnings announcement, and dozens more events.

Watch Valuations

Of course, investment criteria will vary from investor to investor. What's important to one stock investor isn't necessarily key to another. There are, however, a few things that all stock investors ought to monitor. 

When most people buy a stock, price is a consideration. Maybe you're a bargain-hunter whose eyes light up at the sight of a low price/earnings ratio. Or maybe you're a go-go growth investor who's willing to pay a steep price for a company with terrific growth prospects. Either way, you have a price you're willing to pay for an investment. Anything above that makes the stock too expensive for your taste.

Once you've bought a stock, valuations still matter. If a stock's price/earnings, price/sales, or price/fair value ratio jumps significantly from where you bought it, that increases your price risk, because more of the company's value is in the unknowable future. (Price/earnings and price/sales ratios are widely available; price/fair value ratios are available to Morningstar.com Premium subscribers, and are calculated by dividing the the company’s share price by what Morningstar’s equity analyst thinks that company is worth, based on discounted cash-flow analysis.) If the expectations underlying that higher valuation don't pan out, the stock's price can plunge back to earth.

Conversely, if a stock's P/E or price/fair value shrinks significantly, take notice. You may still like the company, and you now have the opportunity to buy more of it at the cheaper price. But if a shrinking share price signifies deteriorating fundamentals at the company, you may no longer want to own the stock. Only you can determine what falling prices means for you.

Investigate Rapid Price Moves

If a stock's price shoots up or down, something's going on. Maybe the company has reported better-than-expected financial numbers, and its stock price has risen on the news. Or maybe the stock's price is sinking like a stone after the company announced operational problems, or the loss of a key customer. In either case, you should be aware of any such price swings in the stocks you own.

Rapid price moves aren't necessarily anything to panic about. However, understand why the stock's price moved the way it did. Then, decide what to do. In many cases, you'll probably want to sit tight. Again, if the stock still meets your investment criteria, why sell? 

Inspect Earnings

Earnings estimates made by Wall Street analysts are important to the prices of your stocks. Each quarter, companies try to exceed the estimates that analysts have made. If companies exceed expectations, they're usually rewarded with a pop up in their stock price. If companies fall short of expectations--or sometimes if they only meet expectations--their stock prices can take a beating.

We don't recommend relying too heavily on whether or not companies meet or beat quarterly estimates; a company that misses estimates can still have great growth prospects. Conversely, a company that exceeds expectations may face roadblocks ahead. 

Nevertheless, quarterly earnings figures are useful. A company that consistently exceeds expectations quarter after quarter is doing something right. But a company that has consistently fallen short of estimates for several consecutive quarters probably has significant problems.

Monitor Dividends

Dividends play an important role in many portfolios. They’re a sign that corporate management is committed to shareholders, and companies tend to be reluctant to cut them. If you're nearing retirement, you may look to regular dividend payments to help supply you with income for living expenses. And since stocks with high dividend yields tend to be less volatile than non-dividend-paying names, they can provide good balance for anyone's portfolio.

If you own stocks that pay dividends, monitor that payout. You want to see a dividend that's stable, or growing. It's virtually always a bad sign when a company cuts or even eliminates its dividend. 

Listen for News

In addition to all of the above, keep an eye out for major news stories about companies whose stock you own. Watch for merger rumors or announcements, changes in management, new-product development, or strategic shifts. All can affect a company's prospects. 

Regardless of how you do it, monitoring the stocks in your portfolio is just as important as choosing the stocks in the first place. 

   
 

Quiz 302
There is only one correct answer to each question.

  1 Which statement is true?
    a. Changes tend to happen more quickly with mutual funds than with stocks.
    b. Changes tend to happen more quickly with stocks than with mutual funds.
    c. Changes tend to happen at the same pace with stocks and mutual funds.
  2 If a stock no longer meets one of your investment criteria, what should you do?
    a. Buy more of it
    b. Place it on a "watch" list
    c. Sell it
  3 If the price/earnings ratio of one of your stocks shrinks significantly, what should you do?
    a. Buy more; shares are cheaper
    b. Sell
    c. Figure out why the price/earnings ratio fell
  4 The price of one of your stock shoots up. What should you do?
    a. Buy. Market sentiment must be good.
    b. Sell. The stock must be overpriced.
    c. Determine why the stock is behaving the way that it's behaving.
  5 One of your companies misses quarterly earnings estimates. You should:
    a. Determine why the company missed estimates and what its future growth prospects are.
    b. Sell. Companies that miss estimates one quarter always have bad growth prospects.
    c. Buy. The stock price will get beaten down and you'll be able to get growth on sale.
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