As a financial planner, you must know when is the best time to buy and sell assets. Certain techniques and tools that help determine whether an investment is a winner or a loser should be kept in mind. Having a financial management degree puts you in a better position to gain trusted clients. You may wonder how to successfully navigate complex decisions when it comes to asset management. Statistics such as P/E ratios and ROI capital make the decision-making process a bit easier.

Research published in 1998 by UC Berkeley showed that individual investors were 50% more likely to sell a winning stock than they are to sell a losing stock. According to numerous academic studies, mutual fund managers who hold onto losing stocks underperform, on average, by four percentage points annually compared to those fund managers who cut their losses. A study from Northwestern University found that people are much worse at estimating whether a bad investment will produce mild or severe losses than they are at predicting whether or not a winning investment will generate small or large gains. Financial planner courses can help to distinguish between the two to improve forecasting abilities.

According to FactSet Research Systems, only 3% of all U.S. listed stocks were considered “sells” as of November 2011. In theory, the ratio of buy to sell ratings should be roughly 50/50. However, this has likely never been the case. In the late 1990s, the ratio was 100+ buys for every sell. During this time, Merrill Lynch had buy ratings on 940 stocks and sell ratings on just seven; Salomon Smith Barney: 856 buy ratings and four sells; Morgan Stanley Dean Witter: 670 buys and zero sells.

Achieving a financial management degree will inform you about many investment terms. An important one to understand is a P/E ratio. A company’s P/E ratio is its stock price divided by a year’s worth of its per-share earnings. It is one measure of how much investors are paying for the value a company creates. The S&P 500’s P/E is useful for sizing up the broad market at a glance. As of January 2012, the S&P 500 was trading at 14.5 times trailing earnings (actual earnings over the previous four quarters). A variation of the P/E ratio is to use “operating” earnings, as defined by regulators. According to S&P, there is no legal definition for operating earnings; it is more principle. A good way to look at operating earnings is if a company wanted to know what it made from the sale of its products, not how much the company paid to finance production. Based on operating earnings, the S&P has a P/E of 13.4, versus an average of 19.1 since 1988. Unfortunately, the historical data on operating earnings is not extensive enough to make this indicator reliable.

One way to determine sustainable growth for a stock is a measurement called “return on invested capital.” This measures whether companies are finding lucrative projects that can power future growth. Today, numbers in the 13-16% are considered ordinary, while those above 30% are excellent. Apple, Philip Morris International, and Priceline.com all have returns on invested capital of more than 40% as of March 2012. Determining whether growth stocks are reasonably priced is difficult since P/E ratios alone do not show growth rates and complex financial models rely on making assumptions far into the future. A simple alternative is “relative” valuation, which involves comparing companies on a combination of metrics such as P/E ratios and long-term earnings-growth forecasts.

Advisors should keep in mind that with fast growth comes the possibility of a quick loss if that growth slows. P/E ratios in the high teens or even low twenties do not significantly increase an investor’s risk level; however, once you get above 25, one should have a very clear understanding of the long-term potential for the business. Financial planner courses can teach you more about topics such as P/E ratios and ROI capital, which will assist in your day-to-day investment choices.

Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about financial planner courses, financial management degree, visit http://www.icfs.com

Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about financial planner courses, financial management degree, visit http://www.icfs.com

Author Bio: Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about financial planner courses, financial management degree, visit http://www.icfs.com

Category: Education
Keywords: financial planner courses, financial management degree