The broad-based drop in the equity market off the February 19, 2020, high and the resulting decline in most portfolio values easily could be blamed solely on the virus and its massive economic impact. Investors, however, need to consider whether the overall market drop alone deteriorated their portfolios.

A generally rising market can mask problems that a down market unmasks rapidly. A thorough financial checkup can reveal problems that might linger and impair performance or alter a long-term financial plan once the market overall recovers.

A basic checkup list 

      1. What is the beta of an overall portfolio and the beta for each stock? Beta is a measurement of volatility versus a benchmark like the S&P 500. The S&P beta is 1.0. A portfolio or a stock with a 2.0 beta, for example, would move up and down twice the percentage of the benchmark. In an up market, this might sound attractive, but whether a portfolio can withstand the reverse in a down market is a key issue.

      2. Is a portfolio excessively weighted in one or more sectors? Year-to-year sector performance varies widely. In one year, a heavy weighting in the best-performing sector can be gratifying, but history suggests it will not hold that rank in a subsequent year. A heavy weighting in a poorly performing sector, even in an overall strong market, can severely impair results. For example, in the past six years, the energy sector of the S&P 500 was the worst performing sector three times, vastly underperformed the market in four years and had an average annual 5.21% loss during a broadly rising market.

    A table shows S&P 500 Sector Percentage Result Rankings, 2015 - 2019
        3. Valuation always is relevant. Over time, price-earnings ratios of individual stocks vary widely, but they often establish a relatively consistent range. Stocks in a portfolio that are well beyond this range might be vastly overvalued, which at least deserves an examination as to whether the stretched valuation is justified.
        4. Large debt loads relative to a company’s total value could be warnings signs, especially if the debt repayment is due soon.
        5. Dividends historically represent a significant part of the total return from common stocks. How well a company’s dividend is covered by earnings can suggest whether a dividend is secure. The willingness and capacity to increase dividend payments should be considered, as it can point to a company’s long-term stability. Excessively high dividend yields often warn that the dividend is in jeopardy.
        6. How a company compares to its competition is important. A company whose operating results consistently underperform its peers demands attention.
        7. A generally rising market tends to lift most stock prices higher although at different appreciation rates. Significant and persistent underperformance of a stock relative to its industry peers and the overall market, however, often is the best warning that something might be awry. Charts can be useful for the average investor by combining visual displays of various stocks to see their comparative performance. Skillfully interpreted, charts also can uncover other potential problems.
        8. Risk management is important. Major changes in the equity and bond markets may require a re-assessment of previously established asset allocations to better align with long-term objectives.

    Would I buy this stock now? 

    Monitoring these items and many more factors that are fundamental requires constant vigilance. A simpler approach, however, can ease an otherwise rigorous process.

    “Would I buy this stock now” is simple question that is the basis for portfolio review on a short-, intermediate-, or long-term perspective. The answer for a short-term trader might be based on momentum and various technical factors. An investor with an intermediate-term objective might assess a stock’s sector and judge how that might fit into the current economic cycle. The same process is useful even for positions intended to be held for years. Market and economic preferences can shift dramatically over time. There is no better example than the “Nifty-Fifty” of the 1970s. This group of 50 stocks was thought to be buys and forever holds. Over time, major shifts in the economy not only deemphasized many of these stocks but also led some into bankruptcy.

    Regardless of the timeframe, if the answer to the basic question is “no”, closer scrutiny is due. This might lead to nothing more than rebalancing a portfolio to avoid excessive concentration. It also could mean that fundamental or other factors point to selling a stock.

    Examining individual holdings regularly always is wise, but so is updating a financial plan. Done correctly, a long-term financial plan that establishes the basis for future financial activity should not need to be altered often, but life changes as well as market changes suggest periodic reviews make sense.

    Markets are dynamic. Change is the norm. While the U.S. economy has grown over many decades and taken stocks with it, the economy is not static. Recognizing this and adjusting accordingly can significantly influence long-term investment results.

    Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

    This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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