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Know When to Sell by Greg Forsythe, CFA, Senior Vice President, Schwab Equity Ratings®, Schwab Center for Financial Research December 28, 2006 Excerpted from the December 21, 2006 issue of Schwab Investing Insights®, a monthly publication for Schwab clients. No one likes a losing stock. So why do we cling to them for far too long? Sometimes we assume great companies are automatically great stocks, or we think a great stock in the past will always remain one. Other times we get fixated on price. How many times have I said I'd sell a stock once it gets above my purchase price—and it never does! Then the torment begins: "What happened? Why didn't I sell it before it dropped? Now what? Should I sell it or hang on?" We believe you can save yourself angst with this simple but powerful discipline: Seriously consider selling any stock in your portfolio with a current Schwab Equity Rating of D or F, regardless of recent performance. You may end up selling some great companies that, in our view, are not great stocks today. In other cases, stocks rated D and F may be struggling companies with no turnaround in sight or stocks whose valuations seem to reflect optimistic forecasts while ignoring weak current fundamentals. Regardless of the reason, we believe a D or F rating means the stock is likely to fall short of the broad market in 2007—and we believe you can find much better opportunities among stocks rated A and B. The objective is to look ahead and identify potential future losers before they cause you (further) pain. Here's where Schwab Equity Ratings can be a great time-saving and return-enhancing tool. Not only do the ratings cover approximately 3,000 U.S.-headquartered stocks (more than any other brokerage firm), but they also provide as many sell recommendations (Ds and Fs) as buys (As and Bs). Historically, F-rated stocks have underperformed the average rated stock by over 5 percentage points on a 52-week basis. That may sound small, but it's more than stocks have historically beat bonds! And there's an added benefit in selling losers at year-end. You can use those losses to offset gains in other areas of your portfolio, thereby reducing your tax bill. To find out how your stocks are rated, log onto Schwab.com, click on the Account tab, then on either Positions or Gain/Loss. Clicking on a stock's symbol and then on the Schwab's Viewpoint tab will show you the reasons for the rating. Clicking on the Schwab Equity Ratings Report provides a comprehensive, printable report on any rated stock. We'll also alert you via e-mail of any change in your stock ratings. Simply sign up on Schwab.com/alerts. If you'd prefer professional management, consider one of the nine mutual funds or four separately managed accounts that use Schwab Equity Ratings to guide their buy/sell decisions (e.g., consider selling any holding whose rating falls to D or F). For details, visit the Mutual Fund tab on Schwab.com or talk to a Schwab consultant. Important Disclosures Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. Investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost. Schwab Equity Ratings are assigned to approximately 3,000 of the largest (by market capitalization) U.S. headquartered stocks using a scale of "A," "B," "C," "D" and "F." Schwab Equity Ratings are based upon a disciplined, systematic approach that evaluates each stock on the basis of a wide variety of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. The explanation and table below are included to assist you in using Schwab Equity Ratings as one component of your own research to evaluate stocks and investment opportunities. Description of Schwab Equity Ratings and Components
Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. Please read Schwab's Schedule H of Form ADV for important information and disclosures relating to Schwab Managed Account ServicesTM. Services may vary depending on which money managers you choose, and are subject to a money manager's acceptance of the account. This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or investment strategy. Schwab does not assess the suitability or the potential value of any particular investment or investment strategy. All expressions of opinion are subject to change without notice. The Schwab Center for Investment Research® is a division of Charles Schwab & Co., Inc. All charts and research have been compiled from publicly available, proprietary and/or licensed data. Past results are not indicative of future performance. (0607-6370) Return to Top |
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