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Roy Rogers used to say: Even if you are on the right track, you’ll get run over if you just sit there. This is our advice to any investment club that has been around for more than a year. Simply put, even if you buy and hold a portfolio of well-researched stocks, you can’t merely leave it there and wait for it to grow. You have to constantly reevaluate things to make sure your investments are meeting the club’s goals.
Believe it or not, the same holds true for members. It’s necessary to check up on members’ attitudes and desires about investing from time to time. You especially need to review your club’s portfolio as old club members leave and new ones join the group.
Does reassessing things sound like a tall order? Start with your portfolio. The Madison Heights, Michigan-based National Association of Investors Corp. (NAIC) suggests that investors look at their portfolio at least once a year. First, for diversity’s sake you want to check to make sure the stocks you hold are in a variety of industries. Next, you’ll want to see that you have companies of various sizes (which you can check by market capitalization or the number of shares outstanding times the stock price). Finally, it’s good to go over your portfolio to check on each stock’s growth potential. Remember: things change over the course of a year.
“Often club members will see great returns in a particular sector, and they will stay in that industry because they feel comfortable with it,” observes Simone A. Thompson, investment representative with Brooklyn, New York-based Edward Jones. Even though a club may be heavily weighted in a particular sector, Thompson recommends it aim for holdings in eight core industries: consumer staples, technology, consumer cyclical, capital goods, communications, health care, financial services and energy.
NAIC also emphasizes a balanced portfolio where 50% of the club’s holdings are in medium-size companies, 25% in companies with $2 billion or more in sales, and the remaining 25% in small companies with sales under $400 million and rapid growth rates. Of course, this ratio may differ depending on your club’s risk tolerance. Members Who are in their 20s and 30s can assume more risk and invest in small, aggressive companies, while dubs with older members will want to stay with large capitalization companies.
“We look to see how much each stock represents,” says Lillian Heard, president and co-founder of the New Yorkbased Unity Investment Partnership. “If a stock is more than 15% of our portfolio, we won’t buy any more shares of that stock or another in that sector.” The club’s stock portfolio is valued at $110,000 and has 18 holdings, including Colgate-Palmolive (6%), Walt Disney Co. (9%), Motorola (5%), Pepsi-Cola (10%), Staples (10%) and Pfizer (13%).
Unity also invests in a few small and mid-size companies. “We have always been heavy on blue chips, but we are now trying to diversify into smaller caps,” says Heard.
When it comes to growth, review each stock and see if it
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