Investing Resolutions for 2013
Thursday, January 3, 2013
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

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Best Practices for Rebalancing
How to reap the benefits, while minimizing the cost.

Lifetime Investment Strategy
The role risk plays in long-term returns.

AAII Discussion Boards
Do you have an investing resolution for 2013?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 38.7%, down 5.7 points
  Neutral: 25.1%, down 0.3 points
  Bearish: 36.2%, up 6.0 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.6%
  Bearish: 30.6%

Take the AAII Sentiment Survey »

If there is a theme for 2013, it may be “known unknowns.” As I write this a few days before Christmas, taxes, federal spending, the pace of domestic and global economic growth, and the European sovereign debt situation are all factors that we know could potentially impact stocks. We don’t know how each will evolve, however. Positive outcomes or at least the expectation of progress could boost stock prices. Negative outcomes or the expectation of further uncertainty could hurt stock prices.

As investors, we are often confronted with uncertainty. Uncertainty, however, can bring opportunity, especially to those who are focused on the long term and stick to disciplined strategies. To help you do this, here is my updated list of investing resolutions to follow for the new year.

1. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Take a look at your current holdings and ask yourself what were the exact reasons you bought them. Do you remember? I personally keep a journal, so I don’t have to rely on my memory to cite the exact characteristics of a stock or a fund that attracted me to it.

2. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A set list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged and provide you with a plan for action. A common component of the AAII portfolios—the Model Shadow Stock Portfolio, the Model Fund Portfolio, Stock Superstars Report and AAII Dividend Investing—is that they all have established sell rules.

3. Have a set schedule for reviewing your portfolio holdings. If you own individual securities, you should plan on reviewing the headlines and other relevant criteria weekly (or daily, if doing so won’t cause you to trade too frequently). Mutual funds and exchange-traded funds (ETFs) can be monitored quarterly.

4. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 70% stocks and 30% bonds, but your portfolio is now composed of 64% stocks and 36% bonds, adjust it. Move 6% of your portfolio out of bonds and into stocks. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by 5% or more.

5. Review your expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified, however, if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

6. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know they are listed. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency.

7. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Vote your proxy statements, do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

8. Be a mindful investor. Slow down and carefully consider each investment choice before making it. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and makes sense given your buy and sell rules. A common trap investors fall into is to let short-term events impact decisions that should be long-term in nature. Yet, if you think through your decision process, you may well find yourself making fewer, but smarter investment decisions.

9. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared, but it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1 and #2. Success comes from being disciplined enough to focus on your strategy and goals, not what others think you should do.

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

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The Week Ahead

Fourth-quarter earnings season will “officially” start on Tuesday afternoon when Alcoa (AA) reports. Joining Alcoa on Tuesday will be fellow S&P 500 members Apollo Group (APOL) and Monsanto Group (MON). Constellation Brands (STZ) will report on Wednesday and Wells Fargo (WFC) will report on Friday.

The week’s first economic report of note will be November wholesale trade data, which will be released on Thursday. November international trade and December import and export prices will be published on Friday.

The Treasury Department will auction $32 billion of three-year notes on Tuesday, $13 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.

AAII Sentiment Survey

For the week ending December 26, 2012, bullish sentiment slipped a bit off of its near-2012 high, as investors waited to see if Congress and the president were going to come to some agreement on spending and taxes to avoid the fiscal cliff. However, bearish sentiment rose for the first time in four weeks.

While a last-minute agreement was reached late New Year’s Eve, investors had little time to digest its ramifications for this week’s survey. As a result, bullish sentiment fell to its lowest level in six weeks in the latest AAII Sentiment Survey. Bearish sentiment continued its rise.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.7 percentage points to 38.7%. This is the lowest level of optimism registered by our survey since November 22, 2012. It is also the first time in six weeks that bullish sentiment fell below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, dipped 0.3 percentage points to 25.1%. This marked the 12th consecutive week that neutral sentiment was below its historical average of 30.6%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 6.0 percentage points to 36.2%. This is the highest level of pessimism registered by our survey since November 22, 2012. After a three-week departure, bearish sentiment is back above its historical average of 30.6%.

Looking back on 2012, bullish sentiment peaked at 51.6% on February 9, the only time during the year the figure was above 50% and the first time since February 3, 2011. Bullishness reached a low of 22.2% for the year on July 19. This was the lowest bullish reading since August 26, 2010, when it fell to 20.7%. The highest bearish reading for 2012 was 48.8% on November 15. Bearishness bottomed out at 17.2% on January 12.

While the market reacted positively on the first trading day following the fiscal cliff agreement, the bill was a stop-gap measure, with negotiations related to spending cuts and the debt ceiling still to come. The bill will shield millions of middle-class taxpayers from tax increases that were set to go into effect at the beginning of 2013. However, it also will let rates rise on wages and investment profits for households earning more than $450,000 a year. The bill will also delay for two months automatic cuts to the Pentagon and other agencies that had been set to take effect January 1, 2013.

The special question we posed to AAII members over the last two weeks asked which industries or sectors they like right now. Of the 249 responses, a little over 17% of respondents said oil/energy; just under 17% like health care, which includes drugs, pharmaceuticals and biotech; nearly 16% favor financials; 14.5% said they prefer construction, homebuilders, housing and real estate; and almost 13% favor technology. A common theme among respondents was the fiscal cliff and the impact any resolution would have on the various sectors and the overall market.

» Take the sentiment survey

AAII Asset Allocation Survey

November Asset Allocation Survey results:
Stocks/Stock Funds:
    58.6%, unchanged
Bonds/Bond Funds:
    20.8%, down 0.4 points
    20.6%, up 0.4 points

Asset Allocation details:
    27.9%, down 1.9 points
Stock Funds:
    30.7%, up 2.0 points
    4.5%, up 0.2 points
Bond Funds:
    16.3%, down 0.6 points
    20.6%, up 0.4 points

Take the survey »

Asset allocation was basically unchanged from last month, as most investors stood pat in the face of the end of the year and the possible fiscal cliff, according to the latest AAII Asset Allocation Survey.

Stock and stock fund allocations were unchanged at 58.6%, which is the lowest allocation to equity investment since December 2011. This ended a three-month trend of members reducing their exposure to stocks and stock funds. The historical average is 60%.

Bond and bond fund allocations declined 0.4 percentage points to 20.8%. This is a five-month low for fixed-income allocations. However, December marked the 42nd consecutive month that fixed-income allocations were above their historical average of 16%.

Cash allocations rose 0.4 percentage points to 20.6%. This is the largest percentage allocated to cash since July 2012. Even with the increase, however, cash allocations were below their historical average of 24% for the 13th consecutive month.

Uncertainty with the impending fiscal cliff weighed on investor optimism regarding the short-term direction of the market. After spending the entire month above its historical average, positive sentiment dipped below the long-term average to ring in the new year. Last month saw AAII members pare their stock holdings in favor of cash, so it may very well be the case that year-end adjustments had already been made. However, an argument can also be made that investors were waiting to see what tax agreements were reached between Congress and the president and what their impact would be on the market.

December’s special question asked AAII members what year-end changes, if any, they were making to their portfolios and why. The majority (57%) were making some changes to their portfolio, while 43% were making no changes. Among all respondents, 17% were adjusting their portfolios due to tax considerations; 10% were adding equity; 9% were reducing equity; 9% were performing standard rebalancing; 9% were buying dear and selling rich; 1% were adding bonds; and 1% were prepared for the end of the world. (The question is whether they are happy or disappointed with the outcome!)

Here is a sampling of the responses:

  • "Going to cash before the Mayan prediction of the world's end comes to pass via our legislators in Washington."
  • "Prepping. The world is going to end!"
  • "My decisions will depend heavily on what happens in Congress with respect to the fiscal cliff."
  • "Will make no changes until Congress gets its act together."
  • "None. Like to move more in bonds but feel the only way the bond market can go is down."
  • "None. I'm a long-term, hands off investor. I make my once-a-year balancing adjustments in the spring; I do not make investment decisions based on tax implications."
  • "Accelerated trimming of some big winners in anticipation of capital gains tax increase in 2013."
  • "Taking more long-term gains to avoid getting screwed by Obama and his class confiscation."
  • "On sidelines due to fiscal cliff."
  • "Possibly moving more money to cash or to more defensive stocks due to uncertainty of political landscape."
  • "Lowering allocation to stocks until fiscal cliff is resolved."
  • "Increasing equity content, as I believe that bonds have entered bubble territory, and inflation may rise."
  • "Increasing my stock allocation to the ‘AAII Shadow Stock Portfolio’ screen."
  • "Getting the mix back to my target asset allocation."

» Take the Asset Allocation Survey