Protecting Your Portfolio from Dementia
Thursday, March 21, 2013
Charles Rotblut, CFA
AAII Journal Editor

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Aging and Investing
Cognitive impairment affects our ability to make good decisions.

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Planning ensures your assets will pass according to your wishes.

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Have you changed how you invest as you’ve gotten older?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 38.9%, down 6.5 points
  Neutral: 27.7%, up 5.2 points
  Bearish: 33.3%, up 1.3 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »


Approximately one in seven Americans age 71 or older have dementia, according to an updated analysis published this week by the Alzheimer’s Association. The analysis also estimates that one-third of Americans age 85 or older have Alzheimer’s disease. Though research shows a higher prevalence among women than men, this difference seems to be attributable to the simple fact that women have longer life spans than men.

The numbers are worrisome for a variety of reasons. Obviously, the human cost is high since Alzheimer’s disease disrupts close relationships with friends and family. Caring for an individual with the disease is costly from a monetary standpoint as well. The disease, and other dementias, can also impact your portfolio, and this is what I want to focus on this week.

As Harvard economics professor David Laibson pointed out, a person does not realize they are losing their cognitive abilities. Rather, problems become harder to solve, but people often forget that their cognitive skills used to be better. For an investor who selects his or her own securities, as opposed to using an index fund, this is problematic. It also puts seniors at increased risk for fraud.

Compounding matters are ongoing behavioral errors. We humans tend to be too risk-averse and overconfident. This combination means the average investor is likely to make risky portfolio decisions out of fear of missing out on further gains or incurring further losses. It also means that the average investor will justify his actions as being correct, even with long-term published data suggesting otherwise. Overlaying the probability of a decline in cognitive abilities compounds these problems.

Beyond following a healthy lifestyle that includes a good diet and regular exercise, there might not be much you can do to prevent dementia. You can, however, take steps to protect your portfolio from its effects. A good starting point is to communicate what you are doing with your spouse, your children or other trusted individuals. It would also be wise to give them written instructions on what to do with your portfolio should they have to take over your finances. (I maintain an “in case of emergency” folder for my wife that includes instructions for handling my investments.) You should also execute legal documents like a durable or springing power of attorney and a living revocable trust. Setting up reminders in your calendar to do certain things with your portfolio, such as checking your allocation, confirming your beneficiaries are correct and reviewing your statements, may also help. Lastly, don’t make any big portfolio changes, particularly changes that involve moving your account or giving someone access to your money, without getting a second opinion from a trusted individual first.

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AAII Model Portfolios

There are several Model Shadow Stock Portfolio transactions this month. Capital Senior Living (CSU) and Standex International Corp. (SXI) were sold because their price-to-book ratios rose above 2.40. Their price appreciation means they are no longer value stocks by our standards. With the proceeds, The Model Shadow Stock Portfolio added Alpha & Omega Semiconductor (AOSL), Salem Communications Corp. (SALM) and TravelCenters of America LLC (TA).

For February, the Model Shadow Stock Portfolio gained 2.2%, outperforming the Vanguard Small Cap Index fund (NAESX), which gained 1.3%, and bettering the DFA US Micro Cap Index fund (DFSCX), which was up 1.1% during February. Year-to-date, the Model Shadow Stock Portfolio has gained 10.6%, beating the Vanguard Small Cap Index fund, which gained 7.8%, and the DFA US Micro Cap Index fund, which is up 6.8%.

The Model Fund Portfolio was up 1.0% for February. This compares to a 1.3% gain for the Vanguard Total Stock Market Index fund (VTSMX). Year-to-date, the Model Fund Portfolio has gained 6.3% compared to 6.9% for the Vanguard Total Stock Market Index Fund.

The Week Ahead

The markets will be closed next Friday, March 29, in observance of Good Friday. (I accidently listed March 22 as being Good Friday in last week’s email and apologize for the mistake.) Passover starts on Monday, March 25, but should not impact trading volume.

Just a small number of S&P 500 members will report earnings next week. They are Apollo Group (APOL) and Dollar General (DG) on Monday; SAIC (SAI) on Tuesday; Paychex (PAYX) and Red Hat (RHT) on Wednesday; and Accenture Plc (ACN), GameStop Corp. (GME) and Mosaic (MOS) on Thursday.

The first economic reports of note will be February durable goods orders, February new home sales, the Conference Board’s March consumer confidence survey and the January Case-Shiller housing price index, all on Tuesday. Thursday will feature the “final” revised estimate of fourth-quarter GDP and the March Chicago PMI. February personal income and spending and the University of Michigan’s final March consumer confidence survey will be released on Friday.

Several Federal Reserve officials will make public appearances next week. Fed Chairman Ben Bernanke and New York Federal Reserve Bank President William Dudley will speak on Monday. Chicago President Charles Evans, Boston President Eric Rosengren, Cleveland President Sandra Pianalto and Minneapolis President Narayana Kocherlakota will speak on Wednesday.

The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.

AAII Sentiment Survey

The latest AAII Sentiment Survey results continue to be volatile, with bullish sentiment pulling back and neutral sentiment rebounding. Optimism is very close to its historical average, while pessimism continues to hover slightly above its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 6.5 percentage points to 38.9%. This puts it about even with its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 5.2 percentage points to 27.7%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 1.3 percentage points to 33.3%. This puts pessimism above its historical average of 30.5% for the fifth consecutive week.

The recent volatility in our weekly Sentiment Survey results shows the divided nature of individual investors’ thoughts about the length of the current rally. While seeing the major indexes trade at record or multi-year highs has prompted some AAII members to be more optimistic about the short-term direction of stock prices, others fret that stocks are overbought and are due for a pullback. Also impacting sentiment are mixed views about the pace of economic growth and ongoing frustration with Washington.

This week’s special question asked AAII members what would make them more optimistic about the short-term direction. A resolution to the ongoing fiscal standoff between Republicans and Democrats was cited most, with slightly more than 38% of respondents saying it would be a positive catalyst. (An additional 15% of respondents discussed their frustration with the political party they disagreed with.) Approximately 13% of respondents said stronger economic growth would make them more optimistic and 10% are looking for an improved global macro picture. Some members (12%) said their sentiment would improve if stock prices pulled back by 5% or 10%. Factored into these numbers are members who listed more than one catalyst.

Here is a sampling of the responses:

  • “Washington getting something done on the budget issue once and for all.”
  • “The federal government tackling the issue of national debt and a continued increase in job growth.”
  • “A 5%-10% correction would make me more optimistic.”
  • “A modest correction. Things are a little overheated in my opinion.”
  • “Increasing positive earnings and a continued increase in housing starts.”
  • “If Congress demonstrates a willingness and ability to act fiscally responsible, I would be very optimistic. I would also expect to see pigs flying around me.”

» Take the sentiment survey