With financial-news programmes, shares newsletters and tip sheets, and an ever-growing number of investment web sites, you'd think that investors watch their shares portfolios 24 hours a day, seven days a week.
Such mega-monitoring would be overkill. True, equities require more attention than funds do. And in a volatile market, changes can happen quickly. Still, the managing of your shares portfolio comes down to making sure your shares continue to meet your investment criteria.
How to review the fundamentals of your equities
Just as you watch for unexpected changes in your funds, watch even more
closely for changes in your companies. Because funds are collections of
equities, changes happen more slowly. But with individual equities,
things can shift quickly. You'll need to monitor your shares more
closely and frequently than you monitor your funds.
You want your shares 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 equities to those criteria. If they no longer meet your criteria, do they still belong in your portfolio?
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 an equity no longer clears most of your hurdles, it is a sell candidate. (We'll talk more about selling in upcoming courses.)
Watch valuations
Of course, investment criteria will vary from investor to investor.
What's important to one shares investor isn't necessarily key to
another. There are, however, a few things that all sahres 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 tech stock 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 or price/sales 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. 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 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 P/E signifies deteriorating fundamentals at the company, you may no longer want to own the stock. Only you can determine what a falling price ratio 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 share'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 shares still meet your investment criteria, why sell?
Inspect earnings
Earnings estimates made by City analysts are important to the prices of
your shares. 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 share price. If companies fall short of
expectations--or sometimes if they only meet expectations--their share
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 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 want the
security of regular dividend payments. And since shares 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 shares 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 shares you own. Watch for merger rumours 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 shares in your portfolio is just as important as choosing the shares in the first place.
To refresh your memory of previous lessons, check out our Learning Centre, where all Investing Classroom lessons are stored for you to re-read at your convenience.
