Letters to the Editor
To the Editors: I think there’s a better way to state Robert Muksian’s conclusion on when to invest (“The Best Day of the Year to Invest in the Market,” February 2006 AAII Journal): Invest as soon and as often as money becomes available. Since even monthly low days can’t be known until after the fact, the only strategies he analyzes that can be implemented are to invest fully the first day of each year or to spread that year’s investment out over the first or last days of the months during the year. You’d think that dollar cost averaging over the year would have some benefit, but what’s happening is that investable funds are being kept out of the market, on average, for five months using the first-day-of-month strategy and for nearly six months using the last-day-of-month strategy. Since the average yearly return of the S&P 500 from 1982 through 2004 is around 10.5%, you’d expect both these strategies to underperform the first-day-of-year strategy by around 5%, which is almost exactly what Muksian’s analysis shows. So the best investment strategy, at least for investment in the broad market, seems to be “if you’ve got it, invest it.”
Hamilton W. Arnold
To the Editors, The real lesson of Robert Muksian’s article (“The Best Day of the Year to Invest in the Market,” February 2006 AAII Journal) is to invest as soon as you have funds. Most of the reduced return between investing in January versus later in the year can be attributed to the gain foregone in the intervening months. Using the historical aftertax return of 7.0% per year fits most of the trend.
Had the investing-month comparisons been over equally long time periods (for example, valuing the January investments in December 2004, February in January 2005, March in February 2005, etc.), the apparent virtue of investing in January would have disappeared. In fact, August, October, and December could even gain an advantage. In sum, invest immediately when you get funds—even if you must park the money temporarily in a safe low-yield account. Over time, a few months of foregone return can compound to make a real difference.
To the Editors: I am a new member and was perusing AAII’s model Mutual Fund Portfolio. Why are you recommending replacing a high value/small cap and very high value/micro cap with a low value/giant cap and a very low value/giant cap? I don’t see how that replacement scenario makes sense.
Also, I just found out that CGM Focus is a closed fund.
James Cloonan Responds: If we can replace a fund that closes with a similar fund we do, but we feel it more important to select funds that meet the criteria than to try to allocate among different styles and cap sizes.
CGM Focus is open; it can be purchased directly from the fund company.
To the Editors: Most of the stocks that you have selected for your AAII Shadow Stock Portfolio are very thinly traded (i.e., less than 100K shares/day, some even less than 10K shares/day). One of the basics for a good trader/investor in stock selection is liquidity; you may be able to purchase the shares quite easily, but you may not be able to sell them anytime soon. Why is liquidity not one of the stock selection criteria used by AAII for its portfolios?
James Cloonan Responds: Actually our stock order rules do provide some liquidity measures. The liquidity required will be determined by the size of the portfolio. Overall, investing in stocks with very small market capitalizations requires some patience in opening and closing positions and a minimum of turnover. While more effort is involved that may be the reason for the higher payoff. A portfolio of over $1 million may not be able to buy all the recommended stocks but will be able to buy about 90% of them. The model Shadow Stock Portfolio has achieved the indicated returns even though it was not able to buy or sell instantly and often bought or sold part of a position at a time.