Stock Investment Project in Examining

Stock Investment Project

In examining the stock portfolio , it was necessary to extrapolate a current or final price for the holdings in the portfolio. The final price used was either the sale price of the stock or the price on June 11, 2005. This allows us to project a gain or loss, not only on the sold stock (realized gain), but also on the unsold stock (unrealized gain). We can also determine the percentage gain or loss on the transaction, as well as the overall gain or loss on the portfolio.

Looking at the overall portfolio, the total loss at this time is 1.8%, calculated as a total loss of $2,094 on total purchases of $118,762. This covers a period of approximately three months of purchases. The loss is even greater when you factor in the trading costs. Even assuming the use of a deep discount broker, each of these trades would probably have cost at least ten dollars. There were 15 trades, so that is another $150 added to the loss.

There are very few bright spots in the portfolio. One of the few is Sears Holdings, which absorbed the shares of K. Mart. The original purchase price of K. Mart was $127 per share and the current price is $137 per share, for an unrealized gain of $10 per share or 7.9%. The worst performer on a percentage basis was U.S. Energy, which dropped from $6.44 per share to $4.41 a share, unrealized, for a loss of almost a third of its value.

The overall investment strategy has been to try to diversify the holdings by purchasing stocks from various industries. However, this did not truly diversify the portfolio. It is extremely difficult, if not impossible to diversity a portfolio by holding individual stock issues. One would have to hold several hundred individual issues to achieve the same diversification that could be achieved through investment in several different stock mutual funds.

The three-month period was too short to see the impact of any macroeconomic conditions. One of the major economic forces over the last year has been the rise in oil prices. Because of this, I would expect that U.S. Energy would have performed better, but that has not been the case. None of the individual holdings are overly dependent upon energy costs, such as we would see in the airline industry, so the performance of the portfolio does not seem to have been overly affected by the rise in energy prices.

The proper approach to investing involves diversifying, not only across different companies, but also across different sectors of the economy. In a given year, one sector of the economy will be up and another will be down. One-year large cap growth stocks will be up and foreign stocks will be down. The next year real estate will be up and large cap growth may be down. If we knew in advance which sectors would be on top, investing would be easy, but we don't. As a result, diversification across different sectors is necessary. Professional investment advisors agree that diversification across 7-10 sectors is adequate for most investors. For larger investors, seeking to reduce risk as much as possible, diversification across up to sixteen sectors can be considered.