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  • Writer's pictureJames S. Falcone

Understanding Equity Selection in Financial Planning

Stock details displayed on a mobile phone placed on a table

Financial planning is an essential aspect of managing your finances. It involves taking a comprehensive look at your current situation and creating a plan for a secure future. Budgeting expenses, investing in the right assets, setting SMART goals, proper asset allocation, and creating a retirement plan are all part of financial planning.

A financial plan includes retirement strategies, risk management, long-term investment plans, tax reduction, and estate planning. Equity selection often plays a crucial role in creating a strategy for long or short-term investment planning and setting clear goals.

Keep reading to understand equity selections' role in financial planning.

What Is Equity Selection and Why Is It Important?

Equity selection, also known as stock picking, is choosing and buying stocks expected to perform well and contribute to your portfolio. The goal is to preserve your purchasing power and increase your portfolio's value over time. This involves analyzing and identifying companies likely to outperform the market based on their current performance and growth potential. The analysts at Fulcrum Wealth Advisors specialize in investment strategies and can assist you with the equity selection process.

Equity selection is in the active management category, which means that a professional money manager or an investor actively tracks the performance of an investment portfolio. An investor needs to look at several factors and a vast amount of data, such as the company's financial statements, its industry, and the overall economy, before making a decision. It's important to note there is no single approach to picking the best stocks and that you will not see an immediate return on investment (ROI). Your investments might only start to bear fruit after a period of time.

Here are a few steps which can be followed to help you get started:

Choose an Investment Theme

Selecting a theme will help create a smaller universe of stocks to analyze. Financial specialists or investors look for industries with scope for growth but are currently running low. They even try to invest in stocks that are strong now but have immense growth potential. Choosing a theme that's easy to understand also narrows down your scope of research, ensuring you make informed decisions at every step.

Understanding the Financial Condition of Potential Investments

When you start the research, understanding the company's size and net worth is crucial. Exploring companies and the total market value of their outstanding shares or determining their market cap will help you categorize companies into micro, small, mid, or large enterprises. Companies with larger market capitalization value are generally safer investment options as they are well established and have been around longer.

Well-established companies are also known to pay out above-average dividends. A few examples of industries that maintain a regular record of dividend payments are basic materials, oil and gas, banks and finances, healthcare and pharmaceuticals, and utilities. Additionally, if a company with a long history of steady dividend payments suddenly reduces or eliminates dividends, it may indicate the company is in trouble.

Another critical factor in determining a company's financial health is its liquidity, debt, and profitability ratios.

Liquidity ratios measure the ability of a company to meet its short-term obligations. The most common liquidity ratio is the current ratio, calculated by dividing total current assets by total current liabilities. The higher the ratio, the more liquid the business is.

Debt ratios determine how much debt a company has and whether that debt level is sustainable. Profitability ratios compare a company's profitability relative to its size and industry peers.

Perform Deep Analysis

A woman using a smartphone and a calculator.

After establishing the financial situation of potential investments, the next step would be to narrow down further according to your financial goals, current status, risk tolerance, tax saving requirements, and the period you wish to hold the investment (time horizon). If you have a longer time horizon, you can opt for a more aggressive investment strategy with investments and choose younger companies with smaller market caps. Your financial advisor will help you do this, usually with the help of stock screening tools.

After you have narrowed down the list of companies that look attractive to you for investments, the last step would be to thoroughly analyze all of them using publicly available information and start investing.

Apart from the above factors, it is also essential to check the company's qualitative competencies like management effectiveness and competitive advantage and watch out for value- traps. A practical tip to review the financial health is to check the company's insider activity – investors can pick stocks where the management team has a substantial stake and keep a close watch on them. Significant insider selling could indicate that management believes the stock prices might fall.

Overall, however strong the stock pick is, it is always subject to market risks, and there is always a risk of your stocks losing value when the broad market sees a dip.

Stock picking is a significant part of financial planning. It helps ensure that your portfolio can meet your goals and needs. It allows you to diversify your portfolio, so even if some stocks don't do as well as expected, others will compensate for it and help keep your portfolio balanced. It also gives you control over how much risk you take with each investment decision. It allows you to find a balance between risk tolerance and reward potential by choosing which companies' stocks you would like to own over time.

Equity selection can be a bit overwhelming, but with the support of a team of professional wealth advisors, it is possible to make intelligent choices that might yield favorable results in the long run. The financial specialists at Fulcrum Wealth Advisors are well-versed in investment planning and management. We can help you construct an equity portfolio customized to your financial goals.


Disclosure - Fulcrum Wealth Advisors
James Falcone and Jon Bever are Investment Advisor Representatives offering securities and investment advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer, and Registered Investment Advisor. Cetera is under separate ownership from any other named entity. In addition, some Investment advisory services are offered through Fulcrum Wealth Advisors, LLC. Fulcrum Wealth Advisors, LLC is a registered investment advisor in the State of Washington.

Branch Address: 10940 NE 33rd PL., #210 Bellevue, WA 98004 Branch Phone: 877-400-0260


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