Hit the Refresh Button on Your Stock Portfolio

Over time, investing in the stock market has been one of the most lucrative ways to build a strong financial portfolio. Of course, stock markets can be chaotic, but the potential exists for stellar returns.

if you keep your initial costs low, work to reduce taxes and set controls to manage risk, you will come out a winner. Assuming you are paying attention to your portfolio, let’s take a refresher course in just a few things you should know and watch.

Asset Allocation
This is the process of dividing your investments among major asset categories such as stocks, bonds or cash that balance your risk and create diversification. You should review your allocation frequently, since this is the exercise that reduces risk and enhances reward. If you have a stockbroker or financial consultant, you can set up how often you would like to review your portfolio. Perhaps once a year is all you care to do, but quarterly is better.

Diversification
Included in your asset allocation is the process of owning various investments that will perform well at different times, thereby reducing your volatility and increasing your returns. This is the age-old adage of not putting all your eggs into one basket. If real estate is taking a beating, you have other sectors, perhaps retail or banking, to balance it out.

Dividend Reinvestment
These are dividends paid to you by the companies as a shareholder of record. When the company is doing well, it pays a percentage of their profit to you. Unless you need the cash dividends (usually paid out each quarter), consider reinvesting those dividends to purchase additional stock in the company.

Financial Ratios
There is a gold mine of information within a company’s annual report if you take the time to understand it. Therein lies the process of valuing a company. This activity goes a bit beyond just reading your monthly or quarterly brokerage statements, which only give a snapshot of the value and the transactions of a company during a certain period. If you truly want to know how your individual holdings are performing, you can peruse those annual thick statements that you’ve likely been tossing in the recycle bin. You will see the following earnings ratios, among others:
Earnings Per Share, or EPS, is the profit a company has made over the last year divided by how many common shares are on the market. EPS serves as an indicator of a company’s profitability.
Price to Earnings Ratio, or P/E, is widely considered the best valuation indicator. A high P/E ratio means investors like you are paying more for the stock’s earnings today in anticipation of future earnings growth. It is the stock’s price divided by its earnings per share.

Indexes
There are various indexes that track the performance of many different investments as a way of measuring the overall performance of a particular investment type or category. For example, the S&P 500 is widely considered the benchmark for large-stock investors. It tracks the performance of 500 large company stocks based in the United States. Similarly, the Dow Jones Industrial Average, or DJIA, the oldest market index, measures the daily price movements of 30 large American companies, blue-chip stocks represented mainly by industrial and consumer goods companies.

Any given day, you will be able to track the performance of the stock market. But to track your particular stocks or bonds, you can download a stock app to your phone or computer.

Stock Split
Also known as a stock divide, this increases the number of shares in a company. A company may split its stock, for example, when they believe the market price per share is too high or is deterring small investors from buying shares. Some believe this leads to higher stock prices; however, this has not proven to be the case. Stock splits have occurred after a large run up in share price, though. But in any case, stock splits do increase the numbers of buyers and sellers. Some companies refuse to split their stock, keeping the price high. This in turn reduces trading volume. Consider well-known Warren Buffett’s company, Berkshire Hathaway, that trades upwards of $288,000 per share!

Total Return
This is the method of calculating your investment’s return that takes share price changes and dividends into account but is calculated before deductions for any fees and expenses. This is a good number to watch—always.

Yield
This is an annual percentage rate of return, the dividend or interest paid by a company and expressed to you as a percentage of the current price.

In addition to the refresher above, it’s always a good idea to take a look at your portfolio when the markets are doing well. Don’t wait for a panic situation. Happy investing! ■

Sources: businessinsider.com, forbes.com and investopedia.com.