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8. Managing Your Portfolio > Forecast Future Returns

Forecast Future Returns

The returns you might achieve using fundamental analysis depend on a company’s earnings growth rate and the price you pay for the stock.

Before you purchase a stock, the challenge is to figure out what sort of return you might earn if you purchase the stock of a company at a specific price. In addition, you might want to compare the potential returns for multiple stocks to see which one best fits your portfolio. After you own a stock, reevaluating its future return from time to time can help you weed unacceptably slow growers from your portfolio. When you use fundamental analysis (see Chapter 4) to evaluate stock, the future earnings growth rate, the potential future P/E ratio, and the current price all play a part in forecasting the future return. With a current price and a potential price a number of years in the future, you can calculate the potential return, often called total return for this situation.


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