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Letters to the Editor

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To the Editors:

In “The Top Funds Over Five Years: What Made Them Different?” from the April 2005 issue of the AAII Journal, John Markese writes that “Five years is a sufficient period to test the fund in different market environments….” Many investors would disagree on the basis that five years would not cover sufficient investment cycles and would also not necessarily be indicative of a manager’s or a fund’s ability to produce sustained long-term results.

Mark Hulbert highlighted this in “Performance Guides: The Longer the Track Record, the Sharper the Image,” in the June 2004 issue of the AAII Journal. He examined the record of investment newsletters over varying periods from short to long term. He concluded that “If you focus on performance over the very long term, it is possible to at least begin to identify those few advisers with genuine ability.” The same would also apply to fund managers and those funds that have been around for some time.

As fund investors look for sustained long-term results with minimal volatility, it would be more helpful if future comparisons between funds—as well as other investment returns and methodologies—could cover at least a 10-year period and longer where possible.

Owen Davis
Via E-mail

John Markese Responds:
A five-year period was cited for a number of reasons. First, many mutual funds do not have a 10-year record. Second, funds often evolve as their asset sizes change: A fund as it existed 10 years ago may not be the same fund as today, and investment objectives often migrate with asset size. Third, fund managers change, which can render older returns irrelevant. Fourth, five years usually encompasses a business cycle; the average has historically been 56 months.

As these reasons show, investment newsletters and mutual funds are very different animals.

To the Editors:

I am a new member of AAII and have reviewed the information on the Shadow Stock Portfolio [see the April 2005 AAII Journal and the Model Portfolios area on AAII.com]. It is not clear to me from the portfolio rules whether or not dividends are reinvested in the stock or not—will you please clarify? This may affect my choice of discount broker, since the least expensive broker (BrownCo) does not offer a dividend reinvestment program.

Brian Sands
Via E-mail

James Cloonan Responds:
If there is a dividend reinvestment program available so that there is no commission, it is an effective way to stay fully invested. With the current level of dividends it probably makes little difference if you accumulate dividends until you have enough to buy an efficiently sized block (so that commission is 1% or less) of the same or another recommended stock.

To the Editors:

I very much enjoy your materials on 401(k) vehicle pros and cons [visit InvestingPathways.com or AAII.com]. However, I believe you overlook a very important negative aspect of the 401(k), which I have been stung by for the first time in my six years investing in one.

Namely, that the IRA-mandated “testing” that must go on to determine maximum contribution levels for so-called “highly compensated” employees can and does significantly detract from the amount one can deduct.

Morever, my “over 50” extra, or make-up, contribution was wiped out when our company capped 401(k)s at 5.2% due to many low-wage employees not participating.

What a shock it was to realize that not only would I have to pay tax on $5,600 in “new” income (after filing my tax return, of course) but that there would be much, much less to grow tax-deferred.

Craig J. Borgardt
Via E-mail

To the Editors:

I recently read “How Many Stocks Do You Need to Be Diversified?” by Daniel J. Burnside, Donald R. Chambers and John S. Zdanowicz from the July 2004 AAII Journal. Although I thought it was an interesting study, I found it to be very theoretical and possibly the worst article that I’ve read on diversification in a long time.

The whole premise that volatility equals risk for long-term investors or that we need 100 stocks to diversify away risk is anathema to me. Who among the AAII members can successfully follow 100 stocks?

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As Warren Buffett says, “Wide diversification is only required when investors do not understand what they are doing.”

Philip Durrell
Via E-mail

 

 


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