AAII Investor Update: Japan, Volatility and Your Portfolio
Thursday, March 17, 2011
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

IRA Do’s and Don’ts
There are specific rules about what can and cannot be put into an IRA.

AAII Model Portfolios
These real-world portfolios have solid performance track records and are a great educational tool for our members.

AAII Model Portfolio Feb. Return 1-Year Return
Mutual Fund 3.2% 25.3%
Shadow Stock 5.0% 48.8%
ETF 3.6% 25.1%

Discussion Boards
Many AAII members are discussing how they use the model portfolios.

Most Popular AAII Articles

  1. “Bear Market Grads: What You Should Learn From the Financial Crisis”
  2. “Stock Price Movements Are Unpredictable”
  3. “The Top Funds Over Five Years: Gold, Emerging Markets & Diversification Lead”

As we watch the events unfolding in Japan and hope for the best possible outcome given the existing circumstances, realize that the economic impact of the tragedy remains unknown. The Bank of Japan is aggressively loosening its fiscal policy, but there is only so much a central bank can do in a crisis like this.

If you own a global mutual fund or ETF, there is a high probability that you have exposure to Japan. Japan accounts for the largest country weighting in the MSCI EAFE (Europe, Australia, Far East) index, a global stock index covering more than 20 countries. You may also have non-Japanese holdings that are down in response to the earthquake and tsunami, such as utility companies in the U.S. that operate nuclear power plants.

Compounding matters is the fact that the S&P 500 had pulled back after trending upward for several months. Since asset prices never move in one direction without interruption, a decline was bound to happen sooner or later. (As you know, the events in Japan intensified the market’s jitters.) Whether the S&P 500 is in the midst of a correction remains to be seen, but corrections typically result in an 8%–10% decline. Based on Wednesday’s close, large caps have already declined by more than 5%.

AAII promotes a long-term approach to investing. When volatility rears its head, it can be difficult to avoid the temptation to make short-term moves, but I encourage you to resist this urge. The future is always unpredictable, and your best defense against uncertainty is a long-term strategy that includes diversification and regular (e.g., annual) rebalancing.


Two deadlines for retirement savings are approaching.

The first is April 1. Investors who turned 70 1/2 in 2010 must take a required minimum distribution (RMD) from their qualified retirement plans (e.g., a traditional IRA) if they have not already done so. The IRS has a helpful page on its website explaining RMDs.

The second is April 18. This is the last day a contribution can be made to a tax-deferred retirement account—including a traditional IRA, or a Keogh or SEP plan—for the 2010 tax year. Contributions to Keogh and SEP plans can be postponed if a tax extension is filed. IRS Publication 590 covers IRAs and IRS Publication 560 covers Keogh plans.

Changes to retirement savings, whether they take the form of a distribution from or a contribution to an account, require coordinated planning with other accounts. Though it is human nature to put various banking and brokerage accounts into buckets, your net worth is calculated by totaling everything you own. In other words, an outside auditor will not split your savings into a vacation fund, a grandchild’s college fund, a home purchase fund, etc., but rather will look at the total sum you have saved.

Coordinating all of your savings accounts has two major advantages. The first centers on diversification. When an amount is withdrawn from or added to your retirement account, your overall allocations can be shifted. A withdrawal or contribution gives you the opportunity to review how all of your accounts are allocated and make the appropriate changes. For example, if you hold too much in stocks, you could use the RMD as a reason to sell certain stocks or stock funds. Conversely, if you are underweighted in bonds, you put the new contribution to work by purchasing fixed-income securities or funds.

The second advantage centers on reducing your tax exposure. Individual retirement accounts allow investments to grow tax-free. (Savings held in a traditional IRA are only taxed when a withdrawal is made.) Therefore, you should use them to hold the least tax-efficient investments, while placing your most tax-efficient investments in your taxable brokerage accounts. For example, holding dividend-paying stocks or funds in your traditional IRA shelters the income from the IRS. (As an added bonus, they’ll generate cash to help facilitate the RMD.) Similarly, municipal bonds are most beneficial when held in a taxable brokerage account. It reduces your tax bill, and it’s completely legal.


The IRS is picky about what you can and cannot put into an IRA. For example, you can buy an exchange-traded fund that invests in gold, such as SPDR Gold Shares (GLD), but physical gold must meet specific requirements. Alternatively, you can hold an annuity that has incidental life insurance benefits, but you cannot use IRA funds to purchase a life insurance policy.

These may sound like subtle differences, but violating any rule regarding prohibited IRA investments can result in potentially significant tax consequences. Robert Carlson, publisher of the Retirement Watch newsletter, provides some guidance in this AAII Journal article


The Model Shadow Stock, Model Mutual Fund and Model ETF Portfolios have been updated on AAII.com. You can view them on our Model Portfolios page.

After getting off to a slow start in January, the model portfolios bounced back with a strong February. The Model Shadow Stock Portfolio gained 5.0%, the Model Mutual Fund Portfolio was up 3.2%, and the Model ETF Portfolio was up 3.6%, all through February 28, 2011. Overall, February was an outstanding month for the stock market in general, with the S&P 500 and the Vanguard Total Stock Market fund up 3.4% and 3.6%, respectively.

There were one sell and two buys in the Model Shadow Stock Portfolio.

See how other members are using the model portfolios on the AAII Discussion Boards.


We will get our first look at first-quarter earnings this week, with nearly 20 S&P 500 member companies reporting. Included in this group are Tiffany & Company (TIF) on Monday, Carnival (CCL) and Walgreen Company (WAG) on Tuesday, General Mills (GIS) on Wednesday, and Best Buy (BBY) and Oracle (ORCL) on Thursday. Tiffany’s earnings could get extra attention because of the company’s exposure to Japan.

February existing home sales will be published on Monday. Wednesday features February new home sales. February durable good orders will be published on Thursday. Friday features the final revision to fourth-quarter GDP and the final March University of Michigan consumer sentiment survey.

Cleveland Federal Reserve Bank President Susan Pianalto will speak publicly on Tuesday. On Friday, Minneapolis Federal Reserve Bank President Narayana Kocherlakota, Atlanta Federal Reserve Bank President Dennis Lockhart and Philadelphia Federal Reserve Bank President Charles Plosser will speak.

The Treasury Department will auction $11 billion of TIPS (Treasury Inflation-Protected Securities) on Thursday.


Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 28.5%, down 7.5 points
  Neutral: 31.4%, down 0.3 points
  Bearish: 40.1%, up 7.8 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 7.5 percentage points to 28.5% in the latest AAII Sentiment Survey. This is the lowest optimism has been since August 26, 2010. It is also the fourth consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, edged down 0.3 percentage points to 31.4%. This is the second consecutive week that neutral sentiment has been slightly above its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 7.8 percentage points to 40.1%. This is the highest pessimism has been since September 2, 2010. Bearish sentiment has now been above its historical average of 30% for four consecutive weeks.

The continued volatility in the markets is clearly taking a toll on individual investors’ attitudes, as can be seen by today’s numbers. Neither bullish nor bearish sentiment are at levels that would be considered contrarian, however, based on the survey’s historical results. Nonetheless, if the S&P 500 is in the midst of a correction, it is likely we could continue to see elevated levels of bearish sentiment until a short-term floor for stock prices is found.

This week’s special question asked AAII members if the Federal Reserve should be more aggressive in fighting inflation or if the central bank should stay focused on the economy. Approximately half of respondents said the Fed should shift its focus toward fighting inflation. A sizeable minority thought the Fed was correct to keep its focus on stimulating the economy, however.

Here is a sample of the responses:

  • “I would like to see the Fed back off (on providing economic stimulus). I believe they are setting us up for inflation in the long run.”
  • “The Fed is already too late in fighting inflation. Gas and food inflation is just beginning.”
  • “The Fed should continue to stimulate the economy because of problems in Europe, unrest in the Middle East and a possible slowdown in China’s economy.”
  • “Stimulating the economy is more important. Unemployment is still the number one problem for a consumer-based economy.”

Are you bullish, bearish or neutral? Take the AAII Sentiment Survey and tell us.