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Letters to the Editor

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To the Editors:

I am curious about the purchase of BlueLinx Holdings (BXC) on December 7, 2007, for the Model Shadow Stock Portfolio [as shown in the Transaction History of the Shadow Stock Portfolio area on AAII.com]. The stock doesn’t appear to have risen above $4 that day which would indicate a violation of one of the rules

Stephen Szymanski
Via E-mail

Jim Cloonan Responds:

The purchase of BXC you refer to came about as a result of a strange coincidence. I made the purchase decisions based on a screen using November 30 data. That was the one day that BXC closed above $4, so it qualified. When I buy I usually am concerned with stocks that have moved up too much and have gone too high on price-to-book ratio. In the few cases where the price has dropped below the $4 mark after the screen, I have bought them anyway unless something else has happened. But you are correct that this does not comply with the rules as stated and needed to be clarified.

To the Editors:

Why do you set up the Model ETF Portfolio using equal weights instead of in some ‘efficient frontier’ manner? Is it because there is not enough history for the exchange-traded funds (ETFs)? It does seem logical that we should ‘get paid more’ for volatility (other things being equal)—buy less of one and more of another to account for differences in historical return and volatility.

Bernie Ford
Via E-mail

Jim Cloonan Responds:

You are right that the history of ETFs is too short to use the data as an estimate of either expected return or expected standard deviation. Even in the case of our Model Mutual Fund Portfolio where we base judgments on five- and 10-year simple and risk-adjusted returns, we feel using history as an estimate of future returns is useless and so the theoretical allocation of Modern Portfolio Theory does not make sense in the real world.

If expected return is to be used, it would have to be based on fundamental factor analysis and not on history.

Standard deviations tend to be more stable over time and a variation of the efficient frontier might make sense in allocating weights. The problem here is that constant rebalancing has a high cost in ETFs and stocks (spreads and commissions) and is often limited in conventional mutual funds.

Actually, whether we try or not, we wind up with heavier weighting in the stocks with the greatest historical returns because of market action. We certainly review our approach on an ongoing basis.

To the Editors:

Your February 2008 Discount Broker Guide contains some very misleading information. An uninformed reader would be led to believe that brokers such as Scottrade, Schwab, and Fidelity will conduct all no-load mutual fund trading at no cost. This is only true for no-transaction-fee funds. To conduct a Vanguard mutual fund trade, for example, I can assure you that there will be transaction fees charged that are often in excess of what might be charged for a similar sized stock trade on each of these platforms

Bryan F. Bursch, CPA
Via E-mail

The Editors Respond:

The text that accompanies the Discount Broker Guide does explain that the list of no-load funds offered by many discounters at no fee is not unlimited and that interested investors should contact the fund for more details. However, our listing does not make this distinction, and it should be duly noted.

 

 

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