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Letters to the Editor

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To the Editors:

I bought a couple of stocks in April 2005 based on the Shadow Stock Portfolio recommendations. Now, I cannot find them either in the actual portfolio or in the transaction history for 2004. Why is this? Are they still a “hold”? Will they pop up as a “sell” if they reach one of the sell triggers? Or, are they gone from AAII’s monitoring?

If I misunderstand how to follow stocks I buy based on the Shadow Stock recommendations, it may be good to clarify it to others as well as to me.

Jim Oberst
Via E-mail

Jim Cloonan Responds:

The Shadow Stock Portfolio is a real portfolio that we change only quarterly and we follow up only on the stocks in the portfolio. There are two ways you can wind up with stocks not in the actual portfolio. Every month at AAII.com we show stocks that would qualify if we were buying at that time, but sometimes before our quarterly portfolio adjustment these stocks cease to qualify. This usually happens because they have gone up too much in price to meet the price-to-book requirement, but occasionally a negative earnings quarter is announced before our buying period. The second possibility is that the stock qualifies even in a buying period but we have more stocks to buy than we have funds for and don’t buy some of those we show as qualified.

We think it is good that individuals buy stocks when they qualify and when members have available funds. But it is up to the individual to monitor such stocks themselves to see when they should be sold under the portfolio sell rules. This is done quite easily with Stock Investor Pro but it can also be done at Yahoo! where price-to-book ratios and quarterly earnings are provided.

To the Editors:

I enjoyed the article “Should You Consider a Roth IRA Conversion in 2010?” by Christine Fahlund in the August 2006 AAII Journal.

The Other Roth Benefits section covers a number of subjects that all make sense and are convincing arguments to proceed with a conversion.

However, one assumption in all of the examples is that the investor has money available to invest in the “tax savings account.”

For example, in Table 1, a 55-year-old investor is assumed to have $14,375 available to invest in a parallel savings account, which will grow at 8% a year.

This assumption has two problems. First, a 55 year old with only $50,000 in an IRA would most likely not have an extra $14,375 to invest, what with college tuition costs for his children, etc. Second, I know of no savings investment that pays anywhere near an 8% return (long-term CDs pay 5.5% at best).

If the taxes are paid from the rollover amount, then the Roth account will start with $14,375 less than the deductible IRA and the total aftertax withdrawals will be the same for both accounts, with zero net gain for the Roth IRA.

Frederick G. Moritz
Via E-mail

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To the Editors:

Having been a CPA for many years specializing in taxation, I have prepared a great many individual returns. Doing so allows me to peer into my clients’ financial situations and gain a pretty good picture of where my clients stand financially. I can tell you that most people cannot meet the metrics set forth in Table 1 of Charles J. Farrell’s article (“Analyzing Your Financial Health Using Personal Financial Ratios,” August 2006 AAII Journal). With my wife working, having no children and being conservative as far as spending and housing is concerned, even I currently fail the savings-to-income ratio. And my savings-to-income ratio is in excess of 30%! As the tech market fizzled out from March of 2000 to October of 2002, I lost a good deal of appreciation and even had gains turn into losses as I sat by in amazement. I know I am not the only one to suffer this fate, but that experience has taught me to keep losses to a minimum and avoid speculative investments.

Allen Monchil
Via E-mail

 

 


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