Investment Consult

Time to tune up your portfolio

Regular "maintenance" is as beneficial to your investment strategy as it is to your vehicles.

Lewis J. Altfest, PhD, CFA, CFP

Like your automobiles, your portfolio requires maintenance to keep it humming. The first step is to determine which investments are helping you attain your financial goals and which ones aren't. There's no such thing as a "set-it-and-forget-it" investment, as the fates of Cisco, Lucent, priceline.com, and a host of other stocks have proven.

If you have individual stocks, you or your adviser should review them at least once every three months—monthly, perhaps, if they're in a volatile industry such as technology. Look at each company's latest quarterly financial statement and the most recent Value Line report for each stock.* For the latest news on a company, go to its Web site, to Morningstar.com (www.morningstar.com ), or to Yahoo! Finance (finance.yahoo.com).

Mutual funds, on the other hand, you needn't scrutinize more than once a year. That's because they gain diversification by owning dozens—and in many cases, hundreds—of individual stocks. The best source for information on funds is Morningstar. If you haven't got access to the company's Web site, check to see if your local library carries Morningstar Mutual Funds in hard copy.

Not surprisingly, certain factors should spur you to examine the stock or fund promptly. Let's look at those for stocks first.

Sharp price swings. If a stock has declined more than 10 percent in a day or two, or more than 20 percent over several weeks, find out why. In addition to the Web sites I've mentioned, a call to the company's Investor Relations department may help shed light on what happened.

Sudden price increases can also be telling. A jump of 20 percent or more may signal strong earnings growth—or a hyped company that's hot for reasons unrelated to its financial statements. Compare the stock's price-earnings ratio with the average P-E of other companies in its peer group, then ask yourself if it's really worth the current price. Questioning of this sort would have saved many people "technology grief" not long ago.

Disappointing sales or earnings. Large drops—or even numbers that have flattened over several quarters—should serve as a warning. Take special note of big sales slumps, which are difficult for corporate accountants to cover up. If the industry in general is struggling, not just the company you've invested in, you can feel more confident about giving the stock a chance to recover.

Insider selling. As the Enron mess taught us, corporate insiders know a lot more about what's going on than the rest of us. Pay attention to what they do. If they're dumping boatloads of shares, that's a strong sign that you ought to head out, too. For a sense of what insiders are doing, go to Morningstar.com, enter the stock's ticker symbol, then click on "Ownership."

For mutual funds, beware the following red flags:

The portfolio manager departs. Often, to minimize the loss of a manager, the fund company will say that buy and sell decisions were made by "committee," or that an assistant portfolio manager really ran the fund. Don't buy it. If a manager leaves, it's usually a whole new ball game.

The fund company is sold. Several fund companies have consolidated in recent years. Scudder was bought by Zurich Financial, Warburg Pincus by Credit Suisse, and Sanford Bernstein by Alliance Capital Management, to name but a few. These deals aren't necessarily bad for investors; they can offer more fund choices, and more resources to run the funds. Nevertheless, the new corporate structure sometimes proves restrictive to talented managers, who then bolt to another company or set up their own.

The fund changes its style. If a manager has drifted from an avowed, long-term investing style—from owning small-cap to large-cap stocks, for instance—it's a good time to review and perhaps sell the fund. Morningstar.com shows the fund's style for the most recent three calendar years (under "Portfolio," see "Style Box Detail"). Morningstar Mutual Funds goes back even further.

Performance is unusually poor. If your fund's three-year total return trails the average for its investment category by 7 or more percentage points, dig deeper. If it's worse by 10 to 15 percentage points and the fund company doesn't have a very good explanation for the underperformance, it may be time to sell.

Cash pours in. If a fund's assets increase sharply, it may be difficult for individual managers, and the firm as a whole, to handle this large influx effectively. To get all of the money invested in the market and still comply with SEC rules that limit ownership in any one company, some managers may be forced to buy stocks that they're not entirely familiar with. This, in turn, could have a negative impact on returns.

*See "Investment Consult: Here's your best tool for checking out a stock," Jan. 22, 2001.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. ( www.altfest.com ), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

 

Lewis Altfest. Investment Consult: Time to tune up your portfolio. Medical Economics 2002;10:28.