Diversified stock portfolios cushion market mishaps

By DEBBIE WALTZER

D WEEKLY

David Henion will never forget the pained look on the couple’s faces. The pair had been referred to Henion—a CPA and managing partner at Forte Capital LLC—by their attorney.

“The vast majority of this couple’s net worth was tied to Global Crossing stock, and they had recently lost 90 percent of their wealth,” he recalls. “I had to tell them, honestly, that I didn’t think I could help them.

“The wife cried, but thanked me for being so candid with them. I felt so bad for them. They had lost a huge amount of their money.”

Lesson learned by these investors and hopefully, others?

“Diversify your portfolio,” Henion replies, whose Pittsford-based firm of 15 employees advises some 300 clients.

The decision of when to sell a particular stock is tricky, according to Henion and other financial planners, which is why a healthy mix of investment parcels is recommended

“With regard to selling, we have predefined valuation sell targets,” Henion says. “For example, if we buy a stock at $12 per share and we think that it will climb to $20 per share, then we’ll sell when it does that. But if it doesn’t reach $20, then we evaluate whether to continue to hold the stock or sell.”

Henion advises holding on to a stock investment for a 12-month period before making a hold or sell decision.

Different clients have different criteria for selling stocks, he adds.

For instance, a couple planning to purchase a home in Naples, Fla., might sell some stocks in order to collect adequate funds for their new property. Likewise, an investor who is pleased with the profits gained from a certain investment in the stock market might decide that it is time to sell it.

Investors in the post-Internet bubble era are “a lot more conservative,” Henion says.

“Our clients are looking for advice,” he says. “Obviously, when the market is up, it’s easy to make money. But our clients today are looking for safer investment strategies.

“They’re more interested in investing in food wholesalers, say, or a well-diversified corporation like General Electric Co. They are not looking to find the next Yahoo or Google.”

A sell discipline is more important than a buy discipline, stresses Henion, whose money management firm was founded in 1996.

“Sell when your personal criteria have been met, when you have attained your goals,” he suggests.

Forte’s clients rely on their money managers to closely watch the market for them.

“It is rare for a client to say, ‘Get me out of XYZ stock’—rather, after lengthy, ongoing discussions about their financial goals and feelings about risk, they rely on us to make those calls,” Henion says. “And much of it comes down to their comfort level with risk.”

The issue of risk is at the heart of most investment strategies, says Michael Fedoryshyn, associate professor of accounting at St. John Fisher College’s Ronald L. Bittner School of Business.

Risk is tied into an investor’s age and circumstances, notes the 15-year Fisher veteran.

“If I were in my 30s, I probably wouldn’t worry too much about trying to time when stocks are at their highest value,” Fedoryshyn says. “Rather, I’d hold onto my stocks for the long term.”

Fedoryshyn—like Henion—is a strong proponent of a diversified portfolio.

“You don’t want to have all of your eggs in one basket,” he says. “That way, if one stock in particular performs poorly, then the others hopefully are doing well to offset any risk.”

A diversif ied strategy works well for busy professionals who either don’t have the time to follow their investments on a daily basis or who have limited access to information related to developments at a company. Therefore, finding a good fit with a money management firm can be quite useful, Fedoryshyn says.

Individuals often approach investing in one of two ways, says Dom Pullano, Rochester-based senior vice president of investments at GunnAllen Financial Inc., a Tampa brokerage firm.

“When clients invest in a developing company, they are generally doing so on a short-term basis,” he explains. “Within that scenario, once an earnings or product announcement is made, we watch how the stock price reacts. If it’s not favorable, we usually sell the stock.”

Clients with an interest in continuous growth of a business, however, are inclined to become long-term investors, Pullano says.

“We recommend giving this process a 9-to-18-month window,” he says. “At that time, if growth and development have slowed, then we likely sell the stock.”

In order to get out of a stock just in time—before its value plummets—many investors prefer using a stop loss order.

“For example,” Pullano says. “You might buy a stock at $10, which then climbs to $13. If you want to preserve a gain, you might put in a stop loss order at $12, so that if the stock declines to $12, the system triggers an automatic sell—and you still realize a 20 percent profit, thereby preventing any major losses.”

Like Henion and Fedoryshyn, Pullano recommends pacing oneself when investing in the growth of a company.

“It might take time, but if you choose wisely, then the value of the company will eventually show up in the stock price,” he says.

Noting that the mantra of real estate is “location, location, location,” Pullano— who advises nearly 300 clients with a colleague—says that the watchword for investing is “diversify, diversify, diversify.”

“That way, you increase your chances of success,” he says. “When the technology sector is up and you have no investments there, then you’ll be left behind. Likewise, if oil is up but you’re not invested in the energy sector, then you’re left out in the cold.”

All three financial experts caution that playing in the stock market can be risky business, an activity that is not for the faint of heart.

“I’ve seen a lot of clients who rode the Internet bubble in the late ’90s, then got killed in the market,” Henion says. “I think that clients today are better educated and more informed about market ups and downs.”

Pullano points to online retailer Amazon.com Inc.’s previously high market value —one that he says was “more than the value of all books that were ever published.”

“Then the company’s stock dropped from $110 per share to roughly $10 per share,” Pullano says. “The lesson learned here is that you shouldn’t necessarily follow the crowd. If you’re missing out on something, then so be it. Don’t chase a return just because you read that it’s hot.”

Fedoryshyn adds: “An investment strategy should be aligned with one’s philosophy about risk. Investing is kind of like gambling. It’s a form of entertainment. And a lot of this is just plain random luck.”

Debbie Waltzer is a Rochester-area freelance writer.

Reprinted with permission of the Rochester Business Journal.

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	Monday, September 6 2010