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financial compass

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Deciding whether to hold onto a non-performing stock can be an agonizing decision, especially if it has earned you a sizable return, or it has sentimental value – perhaps it was a gift from a grandparent.

With investing, however, objectivity is the name of the game. You must take a cold, hard look at what the equity is delivering, or might deliver in the future.

"The simple answer is that one should never get emotionally attached to any stock. Absolutely not," says Stephane Rochon, head of private client research for BMO Nesbitt Burns Inc. in Toronto.

"People look at what were traditionally 'great companies' and so they want to hang on. But that's not really the right way to manage a diversified portfolio.

"You have to look at any stock as being dispensable, to a large degree," he says.

Investors should continue to ride with equities that have been winning for as long as the stock continues to perform, and their original investment case remains intact. But they should also become impatient when stocks begin to lose and be ready to move on to something else that has more potential, Mr. Rochon advises.

Investors can find plenty of information about when to buy stocks, but for selling it's another story. Few investors recognize when a major underlying change affects a once successful equity, says Martin Downie, a senior vice-president and portfolio manager with Investors Group Financial Services Inc. in Toronto.

"One example that I often think about is Yellow Pages, when there was a change in the fundamentals for the industry they were operating in," says Mr. Downie. "We need to be very objective" in such cases.

Another thing to watch for is unexpected negative earnings, or earnings that start to be revised lower. Both situations need careful investigation to determine whether they are temporary or represent a change in the fundamentals of the company, he says.

Among the signs that could point to a long-term decline is a difference in price performance between a stock and its broader sector. Mr. Rochon says that if a stock is lagging by 8 to 10 per cent over the past six months he would take a hard look at it.

"That can certainly signal that there are some problems under the hood, so to speak, which will become more apparent to the market down the road," he says.

Dividends are another important area to assess.

Dividend growth, rather than a high absolute dividend yield, is what really matters when assessing a stock's long-term performance, Mr. Rochon says.

Dividend yield, however, might provide a caution sign, especially if it appears inordinately high compared with other markers such as current bond yields, he says.

"You have to look at 'is the dividend yield too good to be true?' Then you look at whether their cash flow can actually cover that comfortably over the next couple of years," he explains.

Mr. Downie says he is a big believer in dividend investing. But, he says, "we have found that some companies or some industries can have dividends that really aren't sustainable in the more cyclical industries. Obviously we see that in the energy patch, with the very low energy prices."

Life events can also influence hold-or-sell decisions. For example, as investors age they become more conservative. Safer securities might include blue chip stocks with strong balance sheets and good dividend growth prospects, says Mr. Rochon.

International events can also be a factor. Market turmoil in China has had worldwide market repercussions. Mr. Downie says, "I think as investors we need to be mindful of changing economic conditions and shifting long-term trends and how they may impact our investments."

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