7. Using Research
Another way to evaluate your investments’ ongoing performance is through analyst research. Analysts at brokerage firms and at independent research firms look not only at current performance, but also at future potential to give you a picture of an investment’s strengths and weaknesses in the context of the wider market. Analysts also recommend actions based on performance. The actual language analysts use may vary, but in general, they recommend that you buy, hold, or sell an investment.
Whether you actually buy or sell based on an analyst’s recommendation is up to you. Among other things, you should decide whether buying or selling a particular investment is in line with your individual investing strategy. You should always look at analyst research in the context of your own goals and your own expectations for performance.
Furthermore, analysts don’t always agree with each other. As a general rule, they also tend to give more positive than negative recommendations. If you’re using professional research, it may be a good idea to read the recommendations of several analysts to help you determine how an investment is performing and whether you should make any changes to your portfolio.
With bonds, analysts don’t give buy, hold, and sell ratings. Instead, they provide credit ratings, which measure an issuer’s financial ability to meet its debt obligations. If you’ve bought highly rated bonds, called investment-grade bonds, you’ll rarely find the issuer’s credit rating changing dramatically enough to affect your investment’s return. However, unless you’ve bought U.S. Treasury debt, a lowered credit rating is always a possibility.
To keep current with your investments, you should also look at the reports issued by companies relating to their financial situation and future prospects. For example, companies that issue public stock must provide shareholders with annual reports, and they must also file annual reports with audited financial statements, known as 10-Ks, with the Securities and Exchange Commission, which you can find online using the SEC’s EDGAR database at www.sec.gov/edgar.shtml.
Companies also file quarterly reports with the SEC. You can use these reports to evaluate corporate performance in more depth than you can manage by simply checking prices and yields online. You might also want to keep in mind that the annual report that companies send to shareholders, while easier to read than the 10-K, is usually designed to emphasize the positive aspects. The 10-K is plainer and more direct, and may provide insights you may overlook in an annual report.
Mutual funds also provide semi-annual and annual reports to help you track the fund’s progress. The reports give you information about returns and fees, plus a list of the fund’s holdings, so you can check the underlying investments that the portfolio manager has chosen. By comparing these reports over time, you can see how the fund’s holdings have changed. You should also compare the fund’s results to the appropriate benchmark, to see how it fares next to its peers. Most mutual fund reports provide this information, often in the form of a comparison chart.
In addition, it’s very easy to set up online news trackers that will email you stories on the companies, funds, industries, and markets that you’re interested in. This way, you can be on the lookout for news that might have an impact on your investments, and provide you time to analyze the situation and decide what changes, if any, to make to your portfolio.
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