Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

Investing ultimately comes down to math. How much do you need to save? How long will your savings last once you start taking withdrawals?

The answers can all be determined by running mathematical formulas. This is why when Bryant University professor Robert Muksian suggested an article explaining how to calculate answers to these questions using a basic calculator, I expressed interest in it.

I realize some of you probably are not fans of math. Throughout my school years, I wasn’t either. Rather, I sat through algebra and calculus wondering just how x + y could equal z. After graduating college, I began to realize that all math boils down to addition, subtraction, multiplication and division. If you have a basic calculator and a sheet of paper and know what the inputs are, you can solve many mathematical formulas.

As far as portfolio math, there are several shortcuts that can give you an estimate good enough for planning purposes. These shortcuts use magic numbers like 72. (Dividing 72 by the forecast rate of return, or interest rate, calculates how long it will take for savings to double.) Robert gives you several equations incorporating magic numbers here.

If you embrace math, or just want to learn more about magic numbers, be sure to also read the appendix that Robert gave us. You can access the PDF at www.aaii.com/journal/article/magic-numbers-appendix.

This issue’s Beginning Investor column focuses on what you should look at when monitoring a portfolio. Though total return is important, developments that could cause an investment’s attractiveness to change are even more important. I elaborate here.

Total return encompasses both price changes and dividend payments. Going overseas can help you achieve a higher total return, thanks to stronger dividend growth and international diversification. This has been particularly the case for Asian stocks over the past several years. I spoke with Jesper Madsen, who manages two dividend-oriented mutual funds for Matthews Asia, about what investors should consider. A transcript of our conversation starts here.

Here in the U.S., corporations are sitting on record amounts of cash. AAII President John Bajkowski looks for firms with a high level of net cash relative to share price as a preliminary stock filter. Details about this First Cut screen and a list of the passing companies are here.

Regardless of whether you invest domestically or overseas, having clear rules for determining when to buy and sell will make you more a successful investor. For example, W. Scott O’Neil of MarketSmith uses chart patterns to identify buying opportunities and sell rules to limit losses. He elaborates on some of his portfolio management strategies here.

As we went to press, the S&P 500 had a higher yield than 10-year Treasury bonds, which has only happened 20 times since 1953, according to Sam Stovall of Standard & Poor’s. Even though it’s hard to see interest rates going much lower, bonds still have an important role in your portfolio. They provide return of investment and give diversification benefits relative to stocks. The key is to be a long-term investor, use bond ladders and look to the yield curve for opportunities. Stan and Hildy Richelson of Scarsdale Investment Group elaborate further here.

Even if yields are suggesting that stocks are undervalued relative to Treasury bonds, being selective about which stocks you buy is still important. A screen, such as Stock Market Winners, can help. This strategy seeks out stocks possessing nine characteristics of potential future winners. Wayne Thorp, AAII’s senior financial analyst, explains the strategy’s rationale and shows you a list of passing companies here.

Finally, AAII founder and chairman James Cloonan writes about the Model Shadow Stock Portfolio. He discusses the market’s volatility, the latest portfolio changes and his decision to continue holding Conn’s (CONN). You can see his analysis here.

Wishing you prosperity, Charles
Charles Rotblut, CFA
Editor, AAII Journal

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


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