It’s The Simple Things That Matter
Thursday, September 19, 2013
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 45.1%, down 0.4 points
  Neutral: 25.2%, down 4.7 points
  Bearish: 29.7%, up 5.1 points

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

Take the AAII Sentiment Survey »

I have a suggestion that will significantly impact your wealth: Focus on the simple things.

It’s easy to get caught up in the pursuit of beating the market. Forecasts about what the market is going to do, tactical asset allocation strategies to help you avoid down markets and advanced methodologies for stock selection all sound appealing, but there are actions you can take that will have a far greater impact on your long-term wealth and what you pass on to your heirs (or preferred charity).

If it sounds a bit odd, remember that the investment industry doesn’t make much money off of the simple things. Getting you to trade more often, switch brokerage firms, sign up for seminars, buy the latest fund incarnation and the like make the industry’s cash register ring. Your success is very much dependent on your ability to hit the mute button and not be distracted by whatever the investment industry can conjure up.

So what are the simple things you should focus on? Here’s a brief list.

Set a Long-Term Mix of Stocks, Bonds and Cash: Adhering to a well-thought-out asset allocation strategy that only evolves as your personal situation changes will have the single largest impact on your wealth of anything you can do. Stocks will allow you to build wealth, bonds will help cushion the blow of stock market volatility and provide income, while cash gives you a safety net and liquidity for times when you need to spend. Focus on getting this right above everything else.

Keep and Maintain an Emergency List of Instructions: A document explaining how you want your finances managed serves three functions. First, it empowers someone you trust to step in and take care of your portfolio and other financial assets in a manner you would want. Second, if you cannot easily explain to someone else how to manage your portfolio, that’s a clear sign that your strategy is too complicated. Third, it gives you guidelines for making future portfolio decisions. Whenever you get scared about what’s going on in the market, you will have a blueprint you can reference that will help take the emotions out of your decision process.

Periodically Check Your Beneficiary Information: Just as you should check your credit reports once a year, you should check the beneficiary information on all of your accounts and insurance policies every year too. It’s also a good idea to check on who has access to your bank accounts. Make sure all the information is updated.

Create a Will and a Power of Attorney: These two documents can protect you and your estate. The will governs how your estate will be distributed. A durable or springing power of attorney authorizes someone you trust to handle your affairs in the event you are unable to do so.

Communicate With Your Spouse and Heirs: I realize that not every family is close, or even functional, but it is a good idea to communicate your plans and intentions with your spouse, children and even grandchildren. Let them know what your desires are. Furthermore, explain to those who would be responsible for handling your affairs where they can locate key documents and who they should contact. A simple and helpful thing my parents did was to give me a compact disc with copies of key documents on it.

Simplify Your Investing Strategy as You Get Older: Our ability to confront and solve new problems peaks around age 53. As we age into our 70s, 80s and 90s, it becomes harder to fully grasp the risks and complexities of new and unfamiliar strategies. So, as you age, consider simplifying your investment process instead of making it more complex or getting involved with new and unfamiliar investment strategies.

Keep a Diary of Your Investing Decisions: Write down the reasons why you bought an investment, what would cause you to sell it and general guidelines for managing your portfolio. Doing so will keep you more disciplined and will help to reduce the role emotions play in your investing decisions.

AAII Model Portfolios Updated

Saga Communications (SGA) was sold from the Model Shadow Stock Portfolio as it is no longer a value stock. With the proceeds, Fab Universal Corp. (FU) and LMI Aerospace Inc. (LMIA) were added.

For August, the Model Shadow Stock Portfolio lost 7.5%, underperforming the Vanguard Small Cap Index fund (NAESX), which lost 3.2%, and lagging the DFA US Micro Cap Index fund (DFSCX), which was down 3.5%. Year-to-date, the Model Shadow Stock Portfolio has still gained 33.6%, beating the Vanguard Small Cap Index fund, which has gained 19.7%, and the DFA US Micro Cap Index fund, which is up 21.8%. The Model Shadow Stock Portfolio has a compound annual return of 17.6% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 8.8% annually over the same period.

The Model Fund Portfolio was down 3.3% for July and the newly implemented Conservative Portfolio (75% Model Fund Portfolio and 25% iShares Barclays 1-3 Year Treasury Bond ETF) was down 2.5%. This compares to a 2.8% loss for the Vanguard Total Stock Market Index fund (VTSMX). Year-to-date, the Model Fund Portfolio has now gained 12.8% and the Conservative Portfolio is up 9.5%, compared to 16.9% for the Vanguard Total Stock Market Index fund. The Model Fund Portfolio has a compound annual return of 8.6% from its inception in June of 2003, while the Vanguard Total Stock Market Index fund has gained 8.1% annually over the same time period.

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The Week Ahead

Wayne Thorp will speak to our Denver chapter on Monday and our Albuquerque chapter on Tuesday.

The Dow Jones industrial average will start trading with new members Goldman Sachs (GS), Visa (V) and Nike (NKE), and without Bank of America (BAC), Hewlett-Packard (HPQ) and Alcoa (AA) on Monday.

Approximately 10 S&P 500 member companies will report earnings next week. Included in this group is Discover Financial Services (DFS) on Monday, Bed, Bath & Beyond (BBBY) and AutoZone (AZO) on Wednesday, and new Dow component Nike (NKE) on Thursday.

The first economic reports of note will be the July Case-Shiller Home Price Index and the Conference Board’s September consumer confidence survey, with both released on Tuesday. Wednesday will feature August durable goods orders and August new home sales. The August pending home sales index and the final estimate of second-quarter GDP will be released on Thursday. Friday will feature August personal income and spending and the final September University of Michigan consumer confidence survey.

Several Federal Reserve officials will make public appearances. Atlanta president Dennis Lockhart will speak on Monday, Cleveland president Sandra Pianalto and Kansas City president Esther George will speak on Tuesday. Minneapolis president Narayana Kocherlakota will speak on Thursday. Chicago president Charles Evans and New York president William Dudley will speak on Friday.

The Treasury Department will auction $33 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

Bullish sentiment, expectations that stock prices will rise over the next six months, pulled back slightly after a spike last week. Bullish sentiment dropped 0.4 percentage points and is now at 45.1%. This is the second time in six weeks that bullish sentiment is above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined another 4.7 percentage points after dropping 3.3 percentage points last week. Neutral sentiment now sits at 25.2% marking the third time in five weeks that neutral sentiment is below its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 5.1 percentage points to 29.7%. The jump in pessimism follows a large drop last week. The historical average is 30.5%.

The swings in sentiment come as no surprise with all the uncertainty in the market. The Federal Reserve announced that it will not begin tapering its bond-buying program at the current time, causing the market to rally. However, the announcement was made yesterday, so it most likely had no drastic effect on our sentiment survey. It will be interesting to see how the news affects investor outlook next week.

This week’s special question asked AAII members how they felt about the changes made to the Dow Jones industrial average. A little less than a third (30%) of respondents said that they liked the change. Most investors who liked the change stated that they thought it made the average more timely and current. More than a third (36%) of respondents did not care, either because they like to follow a different index or because they do not look at indexes much at all. Some respondents (18%) did not like the change, stating that the change will skew the average upward and that there are too many financials.

Here is a sampling of the responses:

  • “Not much. Don’t care about a price weighted index.”
  • “It makes sense, since those stocks that were taken out are obsolete.”
  • “I believe that although the changes reflect the current investing environment, it is continued movement away from INDUSTRIAL firms to service based firms.”
  • “Logical, but does not have any particular impact on my investing activity.”
  • “Makes the Dow even more ‘skewed up’. I follow the S&P 500 and S&P 500 Equal Weighted.”

» Take the sentiment survey