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Letters to the Editor

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To the Editors:

I thought William Reichenstein’s article was a good piece on what the studies show [“Will Your Savings Last? What the Withdrawal Rate Studies Show,” July 2008 AAII Journal]. But there is one component the author did not address in making one’s savings last: the introduction of well-managed debt. Debt can be the retiree’s best friend in preserving portfolio value and appreciation.

For instance, after retirement, many retirees have no mortgage and think this is well advised. Not necessarily. Instead, for cash flow requirements, consider a home equity line of credit interest-only loan to significantly reduce portfolio withdrawals. Depending on credit worthiness, loan rates might vary between 25 to 50 basis points below prime to 100 or so above. When negotiating the terms or filling out the loan forms, check the box that permits interest-only payments. This way the retiree can pay as much or as little (interest only) or as often as he/she chooses. (Usually, there is no required monthly payment as long as interest is paid to date.) If there is a better-than-projected portfolio gain, buy the loan down. If not, stay invested and pay only the interest.

The bottom line is this: If a retiree’s loan rate is 5%, and their portfolio returns 8%, he or she is 3% ahead and significantly reduces portfolio withdrawals. You might not be paying off the loan any time soon, but so what? Don’t like debt in retirement years? The fact that net worth is positive should be comfort enough. Works for me.

Dennis Goodwin

To the Editors:

In the rules for your Model Mutual Fund Portfolio, nothing is mentioned regarding how long a fund manager should have been managing a fund [see the Model Fund Portfolio area on AAII.com for a full discussion of this portfolio]. Some funds have a very good track record, but the current manager in charge was not responsible for the great returns. Rule 3 doesn’t seem to address this, or is it implied that the current manager must be responsible for the five- and 10-year returns?

Peter Pelz

James Cloonan Responds:

We use the duration of the manager as one of the ways we initially choose between funds that qualify. While it has become a virtual requirement to list a manager, many funds involve more than one decision maker or there is a decision model doing the choosing. In some funds, the manager is a critical factor. We would not drop a fund after a manager change solely on that basis unless we noticed a difference in performance since a manager may have trained their successor well.

To the Editors:

In the article “The Bottom Line: How to Calculate Your Portfolio’s Return” [August 2008 AAII Journal], you calculate the gains of all the equities, bonds, and money markets and then average them to get the portfolio gains. Once you have that, you need to build your own index to see how you are doing. Is all this necessary? Wouldn’t it be easier to just handle the equities and bonds separately and track how they are doing? I can see determining a weighted average for future planning, but not for tracking.

William Fennell

To the Editors:

Regarding “The Bottom Line” (see above letter), why use imprecise estimates when it is quite easy to get an exact answer? Just enter all the cash flows (purchases, sales, dividends, etc.) in a simple MS Excel spreadsheet and use the built-in XIRR function to calculate the internal rate of return

Ronald Engelsman

To the Editors:

Don Cassidy’s “How to Nail Down Your Profits: 20 Questions for a Disciplined Approach” was an excellent article [August 2008 AAII Journal]. I was taught to “buy & hold” by my former investment guy. With this advice, I rode Lucent and MCI to the bottom while paying alternative minimum tax on some exercised Lucent options. Although largely a “paper loss” in this case, there was real money lost as well. A costly lesson: Manage my own money and never buy without an exit strategy.

Mary From Texas

To the Editors:

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The “Guide to the Top Investment Web Sites 2008” in the September AAII Journal lists TreasuryDirect on page 35. There is a yearly maintenance fee for accounts over a hundred thousand dollars. That should have been noted.

Marilyn Plevin

 

 

 

 


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