Know Your Finances:Build an investment portfolio not a casino

Posted by Ellen Le on May 4, 2011

Stocks may not be everyone’s cup of tea, but they surely
have a strong following these days. And well they should when you consider the
alternatives: barely there income from bonds, nosebleed commodity prices, and
real estate that’s often not so easy to invest in.

Stocks of good companies give investors an ownership stake
in well-run companies that produce cash-flow, profits, and dividends. There are
thousands of stocks trading in the market. Only a small percentage of them are
viable investments for your retirement.

The best way to go is to hire a professional advisor who is
independent and registered with the Securities and Exchange Commission and who,
by law, must act as a fiduciary for clients. But if you love choosing stocks
yourself, have the time to devote to it, and therefore insist on building your
own portfolio, here are a few tips.

Don’t
marry a stock. Have a hands-off relationship with no strings attached.
That way, if things go wrong you can say sayonara and move your money into
a different company. Any
losses can be used to offset gains in the future and the money from the
sale is put to better use in a company with better prospects.
Spread
your risk. Own at least fifteen different companies in at least six
different economic sectors. No one can predict when a sector will have its
day in the sun and for how long. Get exposure in many sectors: Energy,
Healthcare, Technology, Industrials, Consumer Staples, Consumer Cyclicals,
Telecom, Utilities, Financials, Materials. The different sectors perform
differently in different economic scenarios.
Have a
discipline about stock fundamentals. For example, only buy stocks that
have low levels of debt. Debt is fine since leverage can enhance stock
profits, but too much debt can be a drag on growth. Another example is to only buy
stocks that have higher returns on invested capital (ROI) than their
competitors. You may also decide to own only those companies that pay you
a respectable dividend. After
a stock meets your initial discipline criteria, then you can delve in to
what management is doing to sustain and grow company revenues and
earnings.
Don’t
pay too much for a stock. You will be rewarded for paying a reasonable
price for a company over time. The market is volatile and stocks often trade
at prices that have nothing to do with their underlying value. The trick
is to not get caught up in the frenzy of paying too much when prices are
climbing and to be alert to opportunities when prices are falling.
Don’t
sell your stocks when the stock market sells off. This tip works best if
you followed tips #1 through #4! Just hold on and wait for the herd selling
to pass. You can even add to your position at a lower price.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.