Before I begin with this week’s commentary, I want to share a special note from AAII's Jim Cloonan regarding the Model Shadow Stock Portfolio. One of the holdings, Willis Lease Finance (WLFC), is offering to repurchase up to 516,129 shares though a modified “Dutch auction” tender. The price range is between $15.50 and $18.00 per share, and the final transaction price has the potential to be below today’s closing price of $17.37. The offer will expire on December 16, 2015. We will NOT be participating in this offer.

A part of the process for managing your finances that is easy to overlook is protecting your digital assets. Not your online persona (e.g., "Fly Fishing Bill"), but your records, statements, passwords, etc. Computer viruses, malware and identity theft are certainly concerns to take action on, but so is protecting your files containing your financial information.

I bring this up because last weekend I completed a long-outstanding project on my to-do list: I set up an online backup service for my computers at home. I had previously been periodically backing up to an external hard drive, but for reasons I’ll explain momentarily this wasn’t a safe enough solution.

Before I get into the whats and whys, I do want to address the issue of the computer itself. Those of you still running Windows XP should upgrade your computer; Microsoft no longer provides security updates for that operating system. I’ve been using a laptop with Windows 10 for about a month now and have been pleased with it. The user interface is far more intuitive than Windows 8 and the operating system is stable. November's issue of Computerized Investing has our annual PC Buyer’s Guide, which contains useful guidance on what to look for.

Computer experts recommend routinely backing up your computer. Hard drives fail and a backup drive protects your files. External hard drives are fairly cheap, with one-terabyte (TB) external drives available online for about $50. I suggest going a step further, however, and maintaining a backup outside of your house.

Here’s why: If both your computer and your external hard drive fail simultaneously or if something happens your house—such as burglary or a fire—you can lose all of your files. An offsite backup is a cheap insurance policy, especially if you keep important files on your computer (e.g., Quicken, TurboTax, statements, tax data, etc.). The easiest solution is to use the cloud. I chose Code 42’s CrashPlan because it’s automated, encrypted and gets good reviews. There are variety of alternatives including Carbonite, Google Drive and Dropbox, among others. You could also keep a hard drive or a USB flash drive outside of your house, but that would require you to physically carry it back and forth. Plus, you are more likely to routinely back up your files if the process is automated.

Those of you who are concerned about putting personal files online can encrypt them first. Macs have the ability to print documents as encrypted PDF files or to encrypt entire folders (use the Disk Utility application) as part of their operating system. Windows users will have to download separate software; 7-Zip is a free program that has received good reviews, though I have not used it.

Anti-virus and firewall software on a PC is a no-brainer. They will protect your computer from malicious software and other cyber threats. I personally use Norton on my laptop at home, though there are other choices. Those of you who do use Norton should consider buying new versions from Amazon or another vendor rather than merely renewing your license, because it’s a lot cheaper to do so. I paid $27.99 for Norton Security Deluxe on Amazon over the weekend, though the website is known for frequently altering its prices. (Viruses on Macs are rare, though you at least should have your firewall turned on and your computer password protected.)

You can also protect yourself by varying your passwords. It’s a good idea to have a different password for every financial website you use, be it a brokerage firm, a bank or your credit card account(s). Though words are easy to remember, you are better off mixing up letters and numbers. A password manager can help with this. I use Dashlane, but there are others such as LastPass. Alternatively, you could keep a small notebook or a Rolodex, but if something happens to them, you may have to reset all of your passwords.

None of this completely guarantees that you will not lose your files or will avoid being hacked. You still have to be very careful about clicking on links in emails and prudent about what you download to your computer. The aforementioned suggestions are simply an insurance policy against unwanted hassles and headaches. As is the case with other aspects of investing, simply getting the odds in your favor goes a long way.

• PC Buyer’s Guide 2015 – Useful advice on what to look for in your next computer.
  
• Protecting Yourself against Tax Scams – This year’s tax guide includes guidance on how to avoid being a victim of tax scams.
  
• Do You Use a Computer to Manage Your Finances? – Tell us on the AAII.com Discussion Boards.
  

Just a handful of S&P 500 member companies will report earnings next week: H&R Block (HRB) on Monday; AutoZone (AZO) and Costco Wholesale (COST) on Tuesday; and Adobe Systems (ADBE) on Thursday.

The first economic report of note will be the October Job Openings and Labor Turnover (JOLTS) Survey, released on Tuesday. Wednesday will feature October wholesale trade data. November import and export prices will be released on Thursday. Friday will feature the November Producer Price Index (PPI), November retail sales, October business inventories and the preliminary University of Michigan’s consumer sentiment survey.

St. Louis Federal Reserve Bank President James Bullard will speak on Monday.

The Treasury Department will auction $24 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.

Hanukkah starts on Sunday. On behalf of everyone at AAII, I wish a happy Hanukkah to those of you who will celebrate the holiday.

The percentage of individual investors describing their six-month outlook as "neutral" is at its highest level since last May. The surge in neutral sentiment occurred as both optimism and pessimism fell.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 2.9 percentage points to 29.5%. Optimism was last lower on September 30, 2015 (28.1%). This is the 37th out of the past 39 weeks with a bullish sentiment reading below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 7.7 percentage points to 49.3%. The spike puts neutral sentiment at its highest level since May 21, 2015 (49.8%). It also keeps neutral sentiment above its historical average of 31.0% for the 12th consecutive week and the 46th week this year.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.8 percentage points to 21.2%. This is a four-week low. The drop keeps pessimism below its historical average of 30.0% for the 10th time in the past 12 weeks.

Neutral sentiment has now been above 40% for the fourth time in five weeks. Readings above 39.7% are unusually high (more than one standard deviation above the historical average) and have been associated with above-average market returns over the following six and 12-month periods.

Individual investors’ aggregate expectations for stock market returns continue to exhibit signs of restraint. Some AAII members are optimistic about the possibility of future gains, while others fret about further declines. The ability of the S&P 500 to continue trading near its record high, seasonal trends and potentially better-than-forecast third-quarter earnings surprises are having a positive impact. Conversely, concerns about third-quarter earnings, the pace of U.S. economic growth, geopolitics, monetary policy and U.S. politics are having a negative impact.

The most recent special question asked AAII members how third-quarter earnings impacted their outlook for stock prices. Nearly one of three respondents (29%) said that third-quarter profit reports have not caused them to alter their outlook. Several of these individual investors said that they maintain a long-term focus. About 22% said earnings had a negative effect. Some said that they reduced their expectations for stock prices as a result of third-quarter profit reports, while others said that the declines in earnings could lead to a reduction in stock prices. More than 13% said that they are more optimistic, mostly because of earnings growth.

Here is a sampling of the responses:

• “Worsening earnings outlook is bound to result in lower stock prices.”
• “I’m an investor for the long haul, so one quarter’s earnings does not influence my outlook for stocks.”
• “Earnings have been better than I expected.”
• “In my opinion, flat to declining profits spells trouble ahead.”
• “I have found earnings to be an encouraging sign for future growth.”
• “They were already expected, so no influence one way or another.”

Bullish: 29.5%, down 2.9 points
Neutral: 49.3%, up 7.7 points
Bearish: 21.2%, down 4.8 points


Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%

Cumulative allocations by individual investors to bonds and bond funds rose last month, according to the November AAII Asset Allocation Survey. Though the magnitude of the increase was small, November was the fourth consecutive month in which fixed-income allocations rose. Equity allocations also rose, though only for the second consecutive month, while cash allocations fell.

Stock and stock fund allocations increased by 0.8 percentage points, to 65.5%. The rise puts equity allocations at a four-month high. It also keeps stock and stock fund allocations above their historical average of 60% for the 32nd consecutive month.

Bond and bond fund allocations rose 0.1 percentage points to 16.7%. As noted above, this is the fourth consecutive monthly increase. November was also the fourth consecutive month with fixed-income allocations above their historical average of 16.0%.

Cash allocations fell 0.9 percentage points to 17.8%, a four-month low. Nonetheless, November was the 48th consecutive month with a cash allocation reading below its historical average of 24%.

Equity allocations have yet to return to their pre-correction levels. Stock and stock fund allocations were above 67% during the nine-month stretch between November 2014 and July 2015, before dropping slightly in August and further in September. The October and November rebound in stock prices has helped to boost the value of equity holdings and reduce pessimism about the short-term direction of stock prices. Bond allocations have been trending up as long-term yields have remained low.

Last month’s special question asked AAII members what influences their decision to use individual bonds or bond funds for exposure to fixed income. Nearly 37% of respondents said that they use bond funds because of a lack of knowledge about bonds, a lack of time to research individual bonds, ease of ownership, simplicity, access to a professional manager and/or diversification. (Some respondents gave more than one reason.) Among the 10% of respondents who said that they own individual bonds, many cited the certainty of returns, the ability to hold the securities to maturity, ladder maturity dates and/or control. Slightly more than 17% of respondents said that they do not own bonds or bond funds.

Here is a sampling of the responses:

• “Simplicity of buying, following and selling bond funds. I don’t have the time or the inclination to become educated about thousands of bond offerings.”
• “The lack of liquidity in individual issues, bond fund expenses and good fund management are the reasons I choose low-cost bond funds.”
• “I like holding individual bonds so I can receive the coupon payments and can count on the income that is provided.”
• “I do not own bonds or bond funds because interest rates are very low and are likely to rise.”
• “With a bond, you can get back 100% at maturity. With funds, this is not the case.”
• “Lack of knowledge and willingness/time to manage, so I leave it to ‘the experts.’”

• Stocks and stock funds: 65.5%, up 0.8 percentage points
• Bonds and bond funds: 16.7%, up 0.8 percentage points
• Cash: 17.8%, down 0.9 percentage points

• Stocks: 32.6%, up 1.4 percentage points
• Stock Funds: 32.9%, down 0.6 percentage points
• Bonds: 3.5%, up 0.4 percentage points
• Bond Funds: 13.3%, down 0.3 percentage points

Take the Asset Allocation Survey.

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