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Letters to the Editor

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To the Editors:

I thought the 2005 Personal Tax & Financial Planning Guide was excellent. However, I noticed one somewhat significant omission in the 2005 tax information.

Specifically, the post-KETRA handling of cash charitable deductions exempts cash contributions made to qualified charities between August 31 and December 31, 2005, from:

 

  1. Being counted toward the 50% of AGI limit on contributions; and
  2. Being counted in the phase-out rules for high income individuals.

Individuals making contributions during this time period can write off up to 100% of AGI to qualified charities (both Katrina-related and others). Also contributions made during this period are not "phased out" for high incomers.

Arthur Strohmer
Via E-mail

To the Editors:

Why are you still hanging on to the Mosaic Equity Trust Mid-Cap Fund in the AAII model Mutual Fund Portfolio [most recently reviewed in the February 2006 AAII Journal]? It is near the bottom of its Morningstar peer group for the past several years.

Barry A. Bertani
Via E-mail

Jim Cloonan Responds:

Mosaic still meets all of our criteria and basically it has been a solid performer if 2005 is ignored. We hesitate to judge any fund on the basis of a one-year performance—particularly in a weird year where many of the best-performing funds had trouble. Also, while I greatly appreciate Morningstar's data, I do not agree with their comparing funds based on their categorization and without significant regard to risk. If Mosaic should do badly for another year, we certainly would consider dropping it.

Barry A. Bertani
Via E-mail

To the Editors:

What is it about Modern Portfolio Theory (MPT) that makes otherwise sensible men say such silly things?

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In "The Real-World Lessons From Investment Theory," William Reichenstein and C. William Thomas [January 2006 AAII Journal] state that MPT "…is the accepted approach to investment and portfolio management in today's day and age." Well, yes, but that doesn't make it right. It only means that those who blindly follow its precepts have a good excuse for failing. Recall that the Ptolemaic theory of an earth centered universe was accepted theory for hundreds of years. Just because a lot of very smart people believe something doesn't make it so. We have known for thousands of years that a false premise can "logically" lead to a false consequent.

The foundation of MPT is comprised of assumptions and approximations that are known to be untrue and inaccurate. Consider that according to MPT, as stated by Mr. Reichenstein and Mr. Thomas, "…security prices in general are fairly valued." It follows then, that if a company's stock price is steadily increasing, the company's value must be increasing. Buying companies whose value is increasing is the primary rule of investing. Therefore, MPT implies that one should buy stocks with positive momentum. Now isn't that silly!

Marv Watkins
Via E-mail

To the Editors:

In "The Best Day of the Year to Invest in the Market," Robert Muksian argues that the best day to invest in the market is the first investment day of the year [February 2006 AAII Journal]. He notes that $1,200 invested in the S&P 500 on the first investment day of each year starting in 1982 would have accumulated to $151,126 by the end of 2004, whereas investing $100 on the first day of each month for the same period would have accumulated to only $141,062—a difference of about $10,000.

Unfortunately, he seems to have ignored that if one invests on the first day of the year, the money is invested for longer than if one invests on the first day of each month, and so it is not surprising that it accumulates to a higher amount. If one invests on the first day of each month through a year, the average date on which the money is invested is mid-June, which is 5.5 months later than if one had invested on the first day of the year.

The average annual return from investing annually on the first day of the year is 12.44%. A similar calculation with monthly investing shows an average return of 12.38%. Given that the returns on the S&P 500 fluctuate greatly from month to month, the tiny difference in return is statistically irrelevant.

Bottom line: This article provides no evidence that timing the market yields any benefit.

Gary Blumsohn
Via E-mail

 

 

 


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