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Computerized Investing > First Quarter 2014

What Members Are Asking Online

PRINT | | | | COMMENTS (2) | A A   Reset

by CI Staff

Portfolio Rebalancing and Taxes

My portfolio of securities is way out of balance because a couple of stocks have gone through the roof—lucky, but very risky. To balance my portfolio, some stocks will have to be sold and the proceeds will be used to buy other stocks. If the profit is immediately reinvested, do capital gains taxes still apply?

 

—Shorebird via Web inquiry

CI Editor’s Response:

Yes they do. Almost any time a security is sold, even if the proceeds are reinvested, you need to pay taxes on the capital gains. Often, investors will sell stocks that have gains and stocks that have losses together to offset the potential tax implications. Either way, it is very beneficial to wait one year before selling stocks (if practical), as stocks sold before holding for one year will be taxed at your marginal tax rate, whereas stocks sold after holding for one year are taxed at the lower long-term capital gains rates. For more information on taxes, you can also visit the AAII Tax Guide, available on the AAII website.

Finding Fundamental Ratios

How do I find a stock’s fundamental ratios? Some, but not all, are given. For example, I can find the price-earnings ratio from Morningstar or Ameritrade, but I would not know where to look for a price-to-sales ratio or a price-to-book ratio. Can you help?

—Wonderbuns via Web inquiry

CI Editor’s Response:

There are a few ways to go about getting these figures. The two ratios mentioned are not hard to calculate; you simply take the price of the stock divided by the sales per share or book value per share. You can find most of these figures in Morningstar.com’s Key Ratios tab. Additionally, Morningstar.com has a Valuation tab where you can find ratios such as price-earnings ratio, price-to-book-value ratio and price-to-sales ratio, among others figures.

AAII Stock Screen Performance

Where can I find the specific criteria and timing for sales of companies in AAII’s Estimate Revision Up 5% screen? This, and similar AAII stock screens, seems to lack sufficient detail to indicate how the returns were estimated in regard to selling. I initially assumed that a stock that no longer qualified would be sold, but is there a separate sell screen called “downward revisions?” At this point, I don’t know whether to sell if a company falls out of the screen, or wait until the company experiences a downward revision.

—trh via Web Inquiry

CI Editor’s Response:

I can see how the names of the screens may cause some confusion. However, the performance for all of the stock screens that we track are calculated the same way. For performance calculations, the stocks are thought of as “bought” if they pass a screen as of the end of the month. At the next month end, if the stock no longer passes the screen, they are thought of as “sold.” In essence, the performance we post is the average price change performance for the passing companies from one month end to the next month end. Keep in mind that the stocks do not take into account bid-ask spreads or commissions and they do not factor in dividends paid. Go to www.aaii.com/stock-screens for more information.

All-ETF Portfolio

How should I go about purchasing shares of exchange-traded funds if I want to copy AAII’s all-ETF subset of the Model Fund Portfolio? I’ve never purchased ETF shares or even stock shares before (I’m quite new to investing). How much money do you recommend I set aside, either as an absolute dollar amount or percentage of my total portfolio, for the ETF portion of my portfolio? Do I purchase all shares for the highest-weighted fund (RSP) first, and then work my way down? Any advice would be much appreciated.

—Astroman

CI Editor’s Response:

In our latest Model Fund Portfolio Update, AAII’s chairman, Jim Cloonan, addressed the desire of many members to have an all-ETF portfolio. He has begun tracking a portfolio that consists of only the ETFs held in the Model Fund Portfolio.

As the Model Fund Portfolio article details, the breakdowns of the five ETF funds in a portfolio should be 40% for Guggenheim S&P 500 Equal Weight (RSP), 20% each for Guggenheim S&P MidCap 400 Pure Value (RFV) and Guggenheim S&P SmallCap 600 Pure Value (RZV) and 10% each for iShares MSCI Frontier 100 (FM) and Vanguard REIT Index (VNQ).

ETFs are traded on the stock exchanges. If you are using a discount brokerage to buy these shares, which you should be doing, I would suggest a portfolio of at least $10,000. This means that you would be investing $4,000 into RSP, $2,000 in RFV, $2,000 in RZV, $1,000 in FM and $1,000 in VNQ. It really does not matter which you purchase first as long as you stick with the weightings. If you have a larger pool of money, simply use the weightings to calculate how much money should be allocated to each fund. A portfolio of just these five holdings should be diverse enough to serve as your entire ETF portfolio.

Visit www.aaii.com/model-portfolios/fund for more information on the Model Fund Portfolio and all-ETF subset.


Discussion

Roger Grossel from FL posted 8 months ago:

The CI Editor's response regarding taxes on capital gains is partly incorrect and thus (partly?) irresponsible.
Although probably most investors know that - in a tax-sheltered account - when a security is sold gains and losses are merely paper events and thus no taxes are due or paid. Only when there are distributions from the account are taxes a consideration.


Robert Couch from FL posted 7 months ago:

1- I'd like to see a service that at least monitors & comments on higher than normal options activity in stocks. It seems that is a strong & definite way to monitor & "anticipate" where the smart &/or insider money is flowing or betting in the future.

2- Is there a service one can subscribe, to get that info? It seems to be readily available to professional traders who move(invest) on such information yet I don't know of a service available to retail investors.


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