Deciding what to include in your portfolio dictates your potential for returns, as well as your potential for risk. Helping you make these selections is where we add some of the greatest value as your trusted adviser. Our goal is to understand, manage, and minimize the effects of risk, and to select company stocks and funds that are poised for growth using the following general guidelines:
Stock and Fund Selection Rules of Thumb
1.Buying stocks whose price-to-earnings (P/E) ratio is lower than the market reduces risk more reliably when you are buying larger, widely followed companies. The consistency of the "High- Yield Dow" approach, which is an example of a successful low P/E strategy, does not work as well with smaller stocks.
2.Today's high flyers that are getting all the good press are always good stories, but rarely good investments. Buying stocks based on the previous year's earnings gains is dangerous if the value of those gains has already been bid into the stock's price in the form of an above market P/E.
3.The most important variable for judging a "growth" stock is its relative strength—the strength of its price movement versus other companies in its industry group—as well as the relative strength of the entire industry versus the market as a whole.
4.The most important variable for judging a "value" stock is its price-to-sales ratio. Using this variable instead of the more popular P/E ratio helps to weed out earnings gains that are a result of accounting adjustments and write-offs, as opposed to those that come from a growing demand for the company's products and services.
5.Most small-capitalization strategies owe their superior returns to micro-cap stocks with market capitalization's below $50 million. While this is a highly profitable area of the market, it is also a very dangerous area because of the greater volatility and lack of liquidity of these types of stocks. Small-cap stocks should only be approached with great caution, and most often through a well selected mutual fund.