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On money

Mere 'facts' on stocks and funds can deceive

Published September 26, 2004

If you've tried researching stocks or mutual funds, you probably have discovered that the "facts" about any potential investment can seem a little slippery.

Take size, for example, which can be descriptive of an individual stock or of the average for a mutual fund portfolio. Classifications as "large" or "small" commonly are based on market capitalization, the value of all a company's outstanding shares. The question is where the lines are drawn separating small, medium and large companies.

By most definitions, anything less than $1-billion is "small." However, the largest stock in the Russell 2000 Index, supposedly a small-cap index, has a market capitalization of $2.4-billion. One research source might use $5-billion as the dividing line between medium and large, while another might say it's $10-billion. Another might use percentages, classifying a set percentage of the stocks in its universe as large or small.

But not everybody likes market cap as a barometer. The National Association of Investors Corp. considers annual sales a more stable measure of company size: Anything less than $500-million is small; anything more than $5-billion is large. All this matters if you are trying to diversify your portfolio by the size of the companies in which you invest. If you don't pay attention to the definitions being used, you might end up with too much invested in one category and not enough in another.

At its simplest, the price-earnings ratio is the current share price divided by the last four reported quarters of earnings. But some analysts calculate the number based on the next four quarters of projected earnings. Projections may fluctuate and, of course, they may not come true. Both types of P-E numbers are useful to know, but stick with the same type when comparing one investment with another.

Investment returns also can be tricky. The key to making comparisons is to be certain you are using exactly the same time period for reference. Because the market is so volatile, adding the most recent week, month or quarter and dropping off the oldest can make a dramatic difference in the calculations. The time period being analyzed also affects other numbers such as the sales or earnings growth rate and return on equity.

The bottom line: Keep looking at the numbers; just be sure to find out what they represent.

Q. I am 59 and am considering retiring at age 62, but I have been advised to wait until age 65. What are the advantages and disadvantages in both scenarios?

From a financial standpoint, it is usually better to retire later rather than sooner unless you have a serious illness or all your relatives died young. You will have to be 66 to collect your full Social Security benefit. If you retire at 62, your benefit will be reduced 25 percent, something you are likely to regret if you live into your 80s or beyond. Your birth year determines normal retirement age and how much your benefits will be reduced at age 62.

Also, you will not be eligible for Medicare until you are 65, so if you retire earlier you will need to find private insurance. That can be difficult and expensive. If you are eligible for any pension, find out how your retirement age affects your benefits.

Each year you delay retirement is another year to build your nest egg through new savings and investment earnings. It also is another year less that you will have to pay for in retirement.

Q. I have owned my condo since 1979 and rented it part of the time for the first six years. I paid income tax on the rent and wrote off costs. How is this handled when I sell? What taxes will I pay on depreciation? My condo has been my permanent home since 1991.

You are home free, according to Mark Luscombe, principal analyst at CCH Inc. and one of the tax experts I consult. Since your condo has been your principal residence for at least two of the last five years, you will not have to pay taxes on up to $250,000 in gains ($500,000 if you are married.) Since you deducted the depreciation before May 7, 1997, it will not be taxed. If you had deducted any depreciation since then, it would be taxed at 25 percent when you sold.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified September 2, 2005, 16:24:23]

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