Check-up

2008 has been a horrendous year for investors. However, turning the page on the calendar does not ensure things will get better; so what can an investor do? We recommend a portfolio check-up.
A thorough check up includes:
1) Upgrading the quality of investments in your portfolio. A very obvious question would be how you can tell the difference between high quality and low quality stocks. We look at several key aspects:

• Low levels of debt: In this tough environment, we would prefer to own companies with little or no debt.
• The ability to generate lots of cash. We want to own companies that can take more of a sales dollar and turn it into cash that can be used to benefit shareholders. That cash can be used to pay dividends, reduce debt, buy back stock (which makes a lot of sense when the stock is really cheap) or make strategic acquisitions.
• Consistency of earnings: We favor companies that do not have large cyclical swings in earrings. In today’s weak economy we would not be surprised to see growth slow down or plateau for even the best companies, but, for now, we try and avoid areas where the swings can be large.

Both high quality and lower quality stocks are down dramatically this year. Chances are you own a few of the lower quality ones, so now is a good time to sell them. Don’t get hung up on what you paid for the stock, the market does not care. If you sell a low quality name, you can very likely reinvest the proceeds in a high quality company whose stock is also off considerably. When the market does improve, the better name will participate, but more importantly the higher quality company will ride out any lingering difficult times much better.

2) Rebalance. When you first structured your portfolio, you most likely made some decisions about what percentage to invest in stocks, bonds and cash. Given the large declines in most stocks, your portfolio is out of balance. For example, if you started 2008 with a 70% allocation to stocks and the remainder in bonds and cash, you probably only have about 60% of your (smaller) portfolio in stocks today. If you really believe in your original allocation, then now is the time to take some of your cash and bonds, buy some stocks and bring your portfolio back into balance.

3) Add dividend paying stocks. We love dividends. They provide a steady (and hopefully) growing stream of cash flow to holders. That cash can be used to meet current expenses and therefore lessen the need to sell beaten-up stocks. If you do not need the cash for current expenses, then reinvest it into some of the many cheap stocks available to you.

4) Review your fund holdings. Many mutual funds have not performed well this year. Now is a good time to re-evaluate your holdings. Is the same manager still running the fund? Has its performance lagged the averages? If a fund has lagged for one year, we do not necessarily view that as a problem, but if a fund lags for several years, it may be time to make a change.


Just like getting a routine physical from a doctor, there may be nothing wrong with your portfolio, but it is important to check. It is also important because you will no longer feel like you letting the markets control you. Instead you will feel empowered as you have taken back some control. Don’t let fears of the market prevent you from making changes!

If you are not comfortable giving your portfolio a check-up, you should talk to a professional advisor. If you do not know of one, give us a call. We would be pleased to help!

Best wishes for a happy and healthy New Year!