Letters to the Editor
To the Editors:
Ron Muhlenkamp is right on: The benefits of international investing have always been overrated (“Foreign Investing: Keeping It Simple,” April 2006 AAII Journal). For the 30-plus years that the EAFE index has been around, the index has returned 11.6% compared to 11.3% for the S&P 500 (1970–2004), but with a standard deviation of 23.5% compared to a much lower 17% for the S&P. Ibbotson’s small-cap index has fared better with a 14.2% return and a lower standard deviation of 22.8%.
The EAFE’s returns in local currencies (taking out the benefit of currencies) has been only 8.6% with a 20.0% standard deviation, more volatile than the 11.3% return of the S&P 500. If one has faith in their ability to forecast currency returns they would be better off buying the S&P and playing the currency markets. One can argue that the emerging foreign markets have provided even higher excess returns than the EAFE. I suggest that the returns in the emerging markets are more closely correlated to currency flows than the underlying fundamentals of the respective markets—and the volatility is off the charts.
Peter B. Hathaway
To the Editors,
Ron Black’s letter in the April 2006 AAII Journal missed the point somewhat about William J. O’Neil’s 8% sell rule [Mr. Black’s letter commented on “When to Sell Stocks to Cut Your Losses,” September 2005 AAII Journal]. Mr. O’Neil didn’t spell this out in his article, but he did mention “stocks showing all the right fundamental and technical factors in place and bought at the proper buy point rarely will retreat 8%.” He knows this through pattern testing over years of market data. It’s an empirically derived number.
Mr. Black decided that too many stocks would get taken out by the 8% sell rule to be of real value. But note that although he found stocks with strong fundamental factors using Stock Investor Pro, he ignored technical factors in his study. I doubt any of the stocks in his screen exhibited the “proper buy point” when he added them to his study. You would need to look at a stock chart to find this information.
Followers of the CAN SLIM method know a proper buy point is found after a basing period in the stock price. A stock is said to reach a pivot price when it breaks out of this basing pattern on larger than normal trading volume. Indeed, a stock purchased near the pivot price is unlikely to retreat back below the pivot. But if the price does decline, that 8% sell rule is a nice piece of insurance against a false breakout. It only applies after a pivot price has been observed. Investors are free to apply other sell methods at other times.
To the Editors:
Every article of yours on asset allocation that I have read deals with age versus conservatism, without reference to the total portfolio value. When the portfolio is adequate to support your likely future needs, then your idea of allocation goes down the tube. Now to the question: How much is enough? That should be the first stage of an allocation article, then the allocation models should follow for that amount. I have used a version of Ray Lucia’s idea of “baskets.” I have a “secure basket” (laddered CDs, Treasuries, etc.), a “conservative investment” basket, a “cash” basket, and then an “aggressive” basket. The “aggressive” basket contains the stocks/investments I hope to have no intended use for during our lifetime since that portfolio is traded mostly in IRAs. That increased percentage really supports the conservative parts with no increased risk. Blindly following an allocation model is a bad mistake in my opinion.
To the Editors:
Your June 2006 AAII Journal article on direct purchase plans forgot to mention the expenses of these plans (“Bypassing the Broker: AAII’s 2006 Guide to Direct Purchase Plans,” by Maria Crawford Scott and Cara Scatizzi). Years ago they tended to be run by the companies and were free or almost free.
Now they are almost all administered by the four companies you listed and can have pretty hefty fees. I terminated my plan that was administered by Mellon because the total fee (fixed plus percentage) for dividend reinvestment amounted to more than 10% of the quarterly dividend. If you have very large positions or high dividend stocks, that most likely would not