• Letters to the Editor
  • Letters to the Editor

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    To the Editors:

    In the May 2008 AAII Journal, Cara Scatizzi described the cons and some of the pros of STRIPS [Separate Trading of Registered Interest and Principal of Securities; “Offbeat Offerings: Treasury STRIPS”]. But there was a glaring exception—the opportunity for extraordinary profits in a declining interest rate environment. This opportunity is the other side of the coin from the risk of price decline if interest rates rise, as described in the article.

    Andy Germain

    To the Editors:

    I wanted to comment on your series of articles relating to the creation of a portfolio of exchange-traded funds (ETFs). [The Model ETF Portfolio was last featured in the May 2008 AAII Journal; see the Model Portfolios area of AAII.com for information and updated performance figures.] I believe Mr. Cloonan is missing the whole point about the purpose of ETFs. The real benefit of ETFs, I believe, is to focus on specific market segments, not a broad basket of stocks or market index. This is based on the principle that the most significant returns are achieved by being in the correct industry groups, which I believe is the best way to adapt to an evolving market.

    I have found that the best approach is to invest in those ETFs that have the best relative performance for the past six to 12 months. The basic system I use is to buy the top four ETFs based on a combination of six- and 12-month relative performance. When an ETF drops out of the top 15, I replace it with the current top ETF. I rebalance once per week. I have some other minor trading rules, including using stop-loss orders.

    I have been evaluating the system since August 2007 using a number of different trading strategies to find the optimal system. The returns from August 2007 through June 2008 range from 30% to 45%. The year-to-date returns range from 13% to 20%. The comparable returns of the S&P 500 index were –9.6% since August 2007 and –8.4% year to date. The number of trades over that 10-month period was about two trades per month.

    Robert Schwarz

    To the Editors:

    A coworker showed me your article and the formula for capitalizing an income steam in the future and using that value as an asset allocation consideration today [“Stand Up and Be Counted: How to Value a Stream of Payments,” July 2008 AAII Journal]. This is a noteworthy concept and the step-by-step approach was very understandable.

    The only problem I saw was that the formula requires the investor to estimate (guess?) the length of time he or she will receive the payments.

    There is an alternative. There are Web sites that can be used to shop for competitive quotes for annuities. But these can also be used to put a present value on a future stream of income. If a Web site tells me that it would cost $273,000 to buy a lifetime annuity of $1,660 per month at age 60, it is also a pretty safe estimate that an income stream of $1,660 per month from a pension or Social Security is worth $273,000 today. I tested one Web site (www.immediateannuties.com) against the table in your article and the answers varied only slightly. I’m sure that the variation is the difference between my guess and the insurance industry’s guess as to how long I will live. Their guess may be better.

    Daniel W. Ryan

    To the Editors:

    As a retiree, I read the article “Optimizing Your Retirement Income: What Works Best and Why” by Christine Fahlund with interest [August 2008 AAII Journal]. If an individual is planning on waiting until they are 65 to collect their Social Security benefits, they need to be reminded that they will not receive that first check on their 65th birthday. Depending on the year of their birth, it will not arrive until they are 65 and 10 months if they were born in 1942. If they were born in 1943, I believe it is 65 and 11 months, and age 66 if they were born in 1944. That means they have to plan to do without those funds for up to one year. This information is spelled out in the annual Social Security review booklet that is sent out in the spring of each year.

    Another twist is that the check will come 29 days after the date of your birth. Let’s say your date of birth was the 18th of the month; your check will not arrive until the 17th of the following month.

    Michael Cosgrov




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