A stock portfolio can grow if tended

Mistakes: They can be costly, and if you can't avoid them, you might be better off in a mutual fund than trying to run your own stock account.

Dollars & Sense

October 28, 2001|By Kristine Henry | Kristine Henry,SUN STAFF

Investors who choose to build their nest eggs with mutual funds are able to take a relatively laissez-faire attitude toward their investments once they've decided which funds they want.

But what about investors who want to go it alone, choosing individual stocks on their own? How many stocks can one person keep track of? How closely do they need to watch their companies? What should they do with the information they gather? And do they stand a chance of doing as well as, or better than, professionals?

"Individual investors have the potential for significant advantages over mutual fund managers because they don't have to judge their performance quarter by quarter," said Michael L. Conn, founder of Investment Management Associates Inc. in Englewood, Colo. "An individual investor doesn't have to think that way."

Investment advisers said a portfolio of 12 to 25 stocks is sufficient to achieve diversification, assuming they've been chosen properly. And, they said, investors need not fret over every bit of news about their holdings.

"What you really want to do is focus on earnings surprises, brokerage estimate changes and strange price movements," said Mitchell Zacks, of Zacks Investment Research in Chicago.

That means that if analysts were expecting a company to earn, say, 5 cents a share in a particular quarter and it earns 3 cents, investors should take note. Investors should pay the same heed to changes in analysts' estimates of earnings, up or down, and large fluctuations in stock prices.

Zacks said investors don't need to pay as much attention to analysts' downgrades (from buy to hold, or hold to sell, for example) because by the time that news hits the street - or even the Internet - the change is already reflected in the stock price because the firm making the change calls its large customers just as the announcement is made.

"Reacting to recommendation changes is a losing game," Zacks said.

To help keep on top of a stock's performance, investors can sign up for instant alerts from trading firms.

Charles Schwab Corp., for example, will send its clients e-mail if a stock they hold falls by more than a certain percentage in a day and also will alert them to changes in analysts' recommendations.

Mike Marcaccio, an investment specialist at Schwab's office in downtown Baltimore, cautioned that the last thing investors should do is try to keep up with every bit of news that a company announces.

"Especially if a company is large, they could put out five to seven press releases in a day and that would drive them crazy," he said. "You've got to use some degree of discrimination or your life will become overrun by this stuff."

Experts agreed that where individual investors can easily stumble is in trying to decide when to sell their stock.

"It's easy to pick up a good stock recommendation on the buy side," said Jack Newell, chairman and chief executive of Dover Partners Inc. in Dayton, Ohio. "But everybody forgets to tell you when to sell it, and that's where most individuals get burned."

It's also hard to sell a poorly performing stock, Marcaccio said. "Selling a loser is extremely hard to do. Investors face emotional regret - `Why did I buy?'" he said. "As soon as they sell, they are making it clear `I lost out.' It becomes an event."

More sophisticated investors, he said, will set price targets. For example, one might determine that they will sell the stock they bought for $45 when it hits $65.

"If there's an earnings surprise, sell sooner rather than later," said Zacks. "If there's a downward revision in earnings estimates, sell sooner rather than later."

"A small investor has to ask in this situation, `Do I have the time, expertise and temperament to do this?'" Marcaccio said. "For some people, it's no, and it's easier to buy mutual funds and review them every six months or once a year."

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