The AAII Portfolios
Thursday, April 18, 2013
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

AAII Model Portfolios
Our micro-cap value Model Shadow Stock Portfolio and our Model Fund Portfolio.

Stock Superstars Report
This stock portfolio approach combines four different investing styles.

AAII Dividend Investing
A total-return approach to selecting stocks with rising dividends.

AAII Discussion Boards
Members discuss how they use the AAII portfolios.

Most Popular AAII Articles

  1. “A Key to a Lasting Retirement Portfolio”
  2. “A Look at the Model Shadow Stock Portfolio’s True Risk”
  3. “Portfolio Rebalancing: Observations From 25 Years of Data”

Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 26.8%, up 7.5 points
  Neutral: 24.9%, down 1.3 points
  Bearish: 48.2%, down 6.3 points

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

Take the AAII Sentiment Survey »

I am often asked about our model portfolios. Specifically, what are the differences among them and how does an investor go about following them? I’ll provide a brief overview in this week’s newsletter.

AAII developed a number of model portfolios to educate our members on how to construct and manage stock and mutual fund portfolios. We currently operate four model portfolios: the Model Shadow Stock Portfolio, the Model Fund Portfolio, the Stock Superstars Report and AAII Dividend Investing. All of the AAII portfolios are tracked with real-money investments made through a discount brokerage firm. The performance we report is net of all transaction costs.

The Model Shadow Stock and Model Fund Portfolios are included with basic and life membership to AAII members. Performance for these portfolios is updated monthly and quarterly updates are published in the AAII Journal. The Stock Superstars Report and AAII Dividend Investing require separate subscriptions since weekly email updates and in-depth, monthly newsletters are provided for them. AAII charges separate subscription fees to interested users so that we can cover the additional data, staff time and analysis resources devoted to these more detailed portfolios.

The Model Shadow Stock Portfolio shows how to turn the most persuasive academic theories into a set of practical selection and trading rules that an individual investor could follow with minimal effort. The portfolio follows a value-oriented approach to invest in small companies with a market capitalization below $720 million. (A company must have a market capitalization between $30 and $240 million to be considered for purchase.) Since these stocks are often overlooked, they are also often mispriced and therefore offer a greater opportunity for upside return. The portfolio is up 22.5% year-to-date through March 31, 2013. (Since its inception in 1993, the Model Shadow Stock Portfolio has an annualized return of 17.4%, approximately double the 8.6% annualized return of the Vanguard 500 Index fund (VFINX) over that time period.) Though the portfolio’s long-term performance is outstanding, it follows a strategy that requires a high tolerance for price volatility. The Model Shadow Stock Portfolio incurred a 50.8% loss in 2008, but then rebounded by 72.3% in 2009. Success comes from sticking to this strategy over the long term rather than trying to time when to buy and sell. The strategy highlights a segment of the stock market in which individual investors have an advantage over institutional investors.

The Model Fund Portfolio holds both mutual funds and exchange-traded funds (ETFs). Uniquely, it uses mutual funds for situations where an active approach can help performance and ETFs when passive strategies make more sense. The portfolio is diversified across a variety of equity styles, though a suggestion for an optional bond fund is also included. It can be a good choice for those investors looking for a long-term approach to fund investing, but not interested in managing a portfolio of stocks. As of March 31, 2013, the Model Fund Portfolio is up 10.0% for the year and is up 8.8% annually from its inception in July 2003.

The Stock Superstars Report (SSR) combines four stock investing styles: profitability and relative strength, value and financial strength, growth at a reasonable price and reasonably priced growth. It shows how to build and maintain a stock portfolio using the quantitative approaches from the AAII stock screens. By using four different strategies, the portfolio diversifies by market capitalization, industry and style. The SSR portfolio holds larger companies than you will find in the Model Shadow Stock Portfolio and, while still leaning aggressive in its investing style, does not incur as much price volatility. Year-to-date, the SSR portfolio is up 10.5% through April 12, 2013. The SSR portfolio has outperformed its benchmark, the Wilshire 5000, during eight out of the last 11 years.

AAII Dividend Investing (DI) is our newest model portfolio, having been incepted at the start of 2012. As the name implies, the DI portfolio invests in dividend-yielding stocks. As such, the portfolio tends to hold mostly large-cap stocks. We follow a total-return approach with the DI portfolio, holding stocks with both the potential to increase in price and a history of dividend increases. Because of its strategy, the DI portfolio is the most conservative of our four model portfolios. Year-to-date, the portfolio has a total return of 15.4% through April 12, 2013. Its current yield of 2.8% remains well above the 1.9% yield of the DI portfolio’s benchmark, the U.S. Dow Jones U.S. Index (IYY), an ETF that tracks the largest 1,200 domestic stocks.

Though the performance data reflects the actual returns we have achieved in real brokerage accounts, we do not manage money for AAII members. Rather, if you want to follow one or more of our portfolios, you will have to use a broker, such as Fidelity, TD Ameritrade, Scottrade or Charles Schwab.

As far as choosing a portfolio to follow, it is a matter of personal preference and financial goals. The Model Shadow Stock Portfolio complements the other three portfolios well. It typically does not hold dividend-paying stocks, however. The DI portfolio will generate the most income. The SSR and Model Fund portfolios are more “middle of the road” portfolios in terms of seeking upside return and generating some portfolio income.

AAII Model Portfolios Update

A transaction was made in the Model Fund Portfolio: CGM Realty Fund (CGMRX) was deleted. The fund’s increased size has forced it to become close to an index fund with its holdings, which does not justify the active management fees. With the proceeds, the Model Fund Portfolio added the Vanguard REIT Index (VNQ).

The Model Fund Portfolio was up 3.5% for March. This compares to a 3.9% gain for the Vanguard Total Stock Market Index fund (VTSMX). Year-to-date, the Model Fund Portfolio has now gained 10.0%, compared to 11.0% for the Vanguard Total Stock Market Index fund. The Model Fund Portfolio has a compound annual return of 8.8% from its inception in June of 2003, while the Vanguard Total Stock Market Index fund has gained 7.9% annually over the same time period.

For March, the Model Shadow Stock Portfolio gained 10.8%, outperforming the Vanguard Small Cap Index fund (NAESX), which gained 4.7%, and bettering the DFA US Micro Cap Index fund (DFSCX), which was up 4.9% during March. Year-to-date, the Model Shadow Stock Portfolio has gained 22.5%, beating the Vanguard Small Cap Index fund, which gained 12.8%, and the DFA US Micro Cap Index fund, which is up 12.0%. The Model Shadow Stock Portfolio has a compound annual return of 17.4% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 8.6% annually over the same period.

More on

The Week Ahead

More than 150 members of the S&P 500 will report earnings next week. Included in this group are Dow Jones industrial average components Caterpillar (CAT) on Monday; AT&T (T), E.I. DuPont (DD), Travelers (TRV) and United Technologies (UTX) on Tuesday; Boeing (BA) and Procter & Gamble (PG) on Wednesday; 3M (MMM) and Exxon Mobil (XOM) on Thursday; and Chevron (CVX) on Friday.

The week’s first economic report will be March existing home sales, published on Monday. Tuesday will feature March new home sales. March durable goods orders will be published on Wednesday. The first estimate of first-quarter gross domestic product (GDP) and the final April University of Michigan consumer sentiment survey will be published on Friday.

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

Individual investors remain pessimistic about the short-term outlook for stocks, even though bullish sentiment did improve in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 7.5 percentage points to 26.8%. Even with the increase, this is the first time optimism has been below 30% on consecutive weeks since July 19 and July 26, 2013. The historical average is 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.3 percentage points to 24.9%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.3 percentage points to 48.2%. The historical average is 30.5%.

This is the first time since March 5 and March 12, 2009, that the bull-bear spread has been below -20 percentage points on consecutive weeks. The bull-bear spread is the difference between bullish and bearish sentiment.

Though optimism did improve, AAII members remain pessimistic about the short-term outlook for stock prices. Both bullish and bearish sentiments are still more than one standard deviation from their historical averages, making this week’s readings unusual. This week’s higher response count, 365 votes, suggests that last week’s large swings were not the result of fewer AAII members taking the survey.

The recent return of some downward price volatility is having an effect on individual investors’ moods. Also playing a role are mixed views about the pace of economic growth, ongoing frustration with Washington and concerns that stock prices have moved too far, too fast.

This week’s special question asked AAII members what would cause the market’s current upward run to end. Responses varied. A change in monetary policy leading to less Federal Reserve stimulus or high rates was cited by about 14% of respondents. A similar number of respondents said weak earnings or poor profit guidance would drag down stock prices. Geopolitical issues, particularly with North Korea, were listed as a potential downward catalyst by about 11% of respondents. Slower or negative economic growth came in fourth, with slightly less than 10% of respondents saying it would adversely affect the markets. (Some AAII members listed more than one catalyst.)

Here is a sampling of the responses:

  • “If the Federal Reserve cranks up interest rates or just hints that it might, then the market would probably plunge.”
  • “The Fed pulling back on stimulus to the economy.”
  • “A lack of good earnings growth and weakening economic data.”
  • “Something drastic like war with North Korea or Iran.”

» Take the sentiment survey