Newspaper article Sarasota Herald Tribune

A Time-Proven Portfolio Strategy

Newspaper article Sarasota Herald Tribune

A Time-Proven Portfolio Strategy

Article excerpt

THE RATIONAL INVESTOR

Why do people invest in stocks? To increase their wealth. Why doesn't everyone with the financial resources do so? Fear -- fear of portfolio volatility and market losses. What many investors don't understand is that a carefully constructed equity portfolio can mitigate a great deal of this problem.

This doesn't mean such a portfolio can eliminate the ups and downs of normal market volatility. What it does mean is it can minimize the probability that these normal ups and downs become permanent losses.

This implies that one critical factor in selecting the individual stocks should be ensuring that each of them has a very low probability of a permanent price collapse or, even worse. bankruptcy. At the same time, investors should understand that there is no equity portfolio that can deliver market-like returns when the market rises and not suffer temporary declines when the market falls.

Investors who ignored this selection criterion over the last 16 years have suffered.

Investors who speculated on dot.com stocks in 2001 saw many go bankrupt and others lose 90 percent of their value. In the 2007- 2009 market downturn, those who invested heavily in even well-known stocks like Lehman Brothers, General Motors, CIT and Lyondell Chemical, among others, saw their portfolios collapse as these companies went bankrupt.

The probability of this happening can be minimized by putting together a portfolio of high-quality stocks with the help of a stock-rating service such as Standard & Poor's. For example, for S&P, high-quality stocks are rated "A+" "A" or "A-" and medium- quality stocks are rated "B+".

High-quality stocks have stood the test of time. They have strong balance sheets and a history of being able to pay their bills even in challenging times. They are very unlikely to go bankrupt.

Of course, investors also should select stocks that are diversified across market sectors and industries. …

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