Updated: 1/24/2010 6:57 PM ET|
A better way to manage money
For many investors, the real work begins after you've bought a stock. Here's a guide to managing your portfolio to maximize its value.
As an investor, buying stocks is only the start of your job. Now you must manage your investments, which involves tracking each of your stocks' performance, watching for sell signals and rebalancing your portfolio when circumstances warrant.
Here are some pointers on how to do those tasks, including tax issues you should consider before selling your holdings.
Tracking your investments
Your collection of stocks is called your portfolio. You should periodically check your portfolio holdings to see whether anything has changed that might require action on your part. How often you check depends on the type of stocks that you hold. Check at least weekly if you hold mostly small, fast-growing stocks. Checking monthly is sufficient if you hold large, well-established stocks such as Procter & Gamble (PG, news) or Google (GOOG, news).
Start by checking recent stock price action. Stocks move up and down every day, often for no decipherable reason, so don't overreact to small price moves -- say, 5% or less. Also, most stocks move with the overall market, so don't be alarmed when your stocks drop during a market downdraft. However, if your stocks do make a big move, up or down, action may be required on your part.
If one of your stocks has moved up substantially -- by 25% or more, perhaps -- it may be time to take some profits (see my advice below on rebalancing). Conversely, if the market has been steady or trending up but your stock has dropped 15% or more, check for news that might have affected the stock's fundamental outlook.
Checking price action
Online brokers typically provide portfolio trackers that show you how much your stock's share price has moved, in percentage terms and in actual dollars, since purchased. But often they don't track its price trends over the past four weeks, the year to date, the past 12 months, etc. -- information you need to effectively manage your portfolio.
Further, if your stocks pay significant dividends, your total return is the sum of your dividends received plus the share price changes. Unfortunately, your brokers' portfolio tracker probably doesn't count the dividends when computing your gains.
Bottom line: Your broker's portfolio manager won't give you the information you need to properly manage your portfolio. Here's a rundown on some of the free portfolio managers available on the Web.
MSN Money Portfolio Manager: MSN's latest Portfolio Manager will include dividends received when it is calculating returns, but you must manually add each dividend payment, and the portfolio reports returns only for the period since you first bought the stock. However, here's a real plus: You can set up the Portfolio Manager to show you the StockScouter ratings and Motley Fool CAPS ratings for each stock.
Both can help you manage your portfolio. The StockScouter ratings give you MSN Money's take on each stock's outlook for the next few months, based on a variety of fundamental and technical factors. The Motley Fool CAPS ratings reflect the consensus of other investors about the outlook for each stock.
Morningstar Portfolio Manager: Morningstar's free tool automatically adds dividends to share price appreciation or depreciation when computing total returns and reports total returns for the past week, month and year to date, and for one-, three- and five-year time frames. On the downside, Morningstar won't show you the total return since the specific date you purchased the stock.
CNBC: CNBC's portfolio tool automatically adds dividends and computes your total return for each stock based on your purchase price. However, it doesn't list returns for other periods, such as year to date, past 12 months, etc.
Finviz.com: The easiest way to check the news on your stocks is to set up a portfolio on Finviz. Then simply navigate to your portfolio on Finviz to see recent news headlines affecting your stocks.
When initially buying your stocks, split your available cash evenly among all of the stocks in your portfolio to reduce risk. That is, if you're buying 10 stocks, put 10% of your cash into each stock instead of overweighting the stock that you think has the best prospects.
Over time, some of your picks will outperform, and others will falter, throwing your portfolio out of balance. For instance, in a 10-stock portfolio, the strong stocks eventually might each represent 20% of the portfolio value instead of the original 10%.
At that point, it's best to rebalance your portfolio by reducing your positions in your winners back down to 10% of your total assets. Doing that gives you extra cash to invest in new stocks.
While you're at it, review all of your holdings. Probably, the outlook for some of your original picks doesn't look as bright as it did when you first set up the portfolio. If so, replace them with new stocks with stronger outlooks.
When to sell
Whether rebalancing or not, periodically check your stocks for sell signals. In a nutshell, consider selling stocks that you wouldn't buy today if you were evaluating them as new candidates.
For growth stocks, sell signals include declining profit margins, slowing revenue growth, disappointing earnings and weak price charts.
Value investors typically set target sell prices before they buy a stock. If you're in that camp, sell when your stock hits your target price, even you think that it has more room to go up. If it hasn't hit your target, sell when you realize that the recovery in fundamentals that you counted on to lift the stock out of its funk isn't going to happen.
Here's an overview of the income tax considerations related to stocks issued by conventional corporations. Different rules apply to stocks issued by special-purpose entities such as real-estate investment trusts, or REITs.
For tax purposes, the cost of your stock, termed your "basis," is the price you paid for the shares, plus sales commissions and related transactions costs. If you inherited the stock, your basis is the price of the stock on the day the original owner died.
When you sell, subtract your basis from your selling price, less transaction costs, to determine your net gain (taxable profit).
If you held the stock for one year plus one day, or longer, your profit is considered a long-term capital gain, and the maximum tax rate is 15%. Your gain is taxed at ordinary income tax rates if you held for one year or less. Since ordinary tax rates are typically much higher than 15%, it makes sense to hold profitable stocks long enough to qualify for the long-term capital-gain rate.
If you lose money on a stock, the loss can be used to offset capital gains, and even ordinary income, but the rules are too complicated to go into here. However, if you sell a stock for a loss at the end of the year and apply the loss to offset gains in another stock, you have to wait 30 days before you can buy the same stock back. This is known as the "wash sale" rule.
If a corporation pays dividends, through 2012 those payouts, termed qualified dividends, are taxed at a maximum 15% rate, the same as long-term capital gains. After 2012, dividends could be taxed as ordinary income, depending on whether the U.S. government again extends the 15% maximum dividend tax rate.
Keeping tabs on a reasonable-size portfolio isn't as daunting as it sounds. Once you've set up your portfolios on the various sites, the whole process would probably take around 30 minutes. One final note: Don't get into the habit of checking your stocks all day long. Doing that will drive you crazy.
At the time of publication, Harry Domash did not own or control the shares of any company mentioned in this article.
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Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
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