Let’s say you bought McDonald’s Corp. (NYSE: MCD) in 1990 when it was selling for $7.94. As of Dec. 31, 2013, it was selling for around $97 per share, and paying a dividend of $3.12 per share. So for the last year, you could be making $3.12 on your $8 investment. However, in the last 23 years, you may have been advised to sell your shares and trade them in for something else. Should you sit on your investment or take your money and run?
At Henssler Financial, we advise a long-term approach. However, you should not buy stocks and forget about them. There were times in the last 23 years where McDonald’s didn’t do very well. There was a decline in the quality of management, the stock price deteriorated, and the financial quality went down. This is a cycle that happens to all major companies, which is why you cannot forget about your investments.
Likewise, you shouldn’t sell a stock just because the price dropped. There could be many reasons for its decline, such as, investors may be following a rumor in the market, or the market as a whole went down. It could be the fast food restaurant sector declined. If you sell McDonald’s and invest in another sector, inevitably that sector will underperform at some point. As an example, the current leading sector for 2014 is Utilities, up about 12%. However, Utilities have underperformed the market for many years.
If you bought a stock with the expectations of growth at 10% a year and the stock doesn’t take off, yes, then selling should be a consideration.
Not only should individual stocks be watched, but you need to watch your portfolio as a whole. In 1990 you invested in McDonald’s and it was 4% of your portfolio, but today it might be 23% of your portfolio. We recommend no single stock constitute more than 10% of your portfolio. Additionally, you have to watch the sectors in your portfolio. Perhaps McDonald’s is less than 10% of your portfolio, but it is a Consumer Discretionary holding, and Consumer Discretionaries make up more than 30% of your portfolio. If the market’s weight for Discretionaries is only 15%, you likely need to trim your holdings and invest in another industry where you are underweight.
So let’s say you own McDonald’s, but XYZ Corp. is expected to grow at 15% and pays a larger dividend. How do you decide to sell? You have to be very confident in the potential performance of XYZ Corp., as it will have to outperform by nearly 30% to get you back to even after you pay state, federal and Medicare taxes on your gains from McDonald’s. Depending on the industry and the trends in the market, such a move may be justified. You should also consider the goals of your portfolio. If your goal is growth, you may see more turnover; however, if your goal is income, you may hold onto stocks longer for the dividend.
Portfolio management is an ongoing review process. It can be difficult, and you will make a wrong decision at times.
At Henssler Financial, we believe you should Live Ready, and that includes understanding portfolio management can be humbling. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
