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Editor's Note

by Charles Rotblut, CFA

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Buckets.

Most of us have financial buckets, even though we don’t refer to them as such. Rather, we use terms like “retirement savings,” “vacation fund,” “checking account,” etc. Buckets are our mental way of segmenting our cash savings and investments by their intended purposes.

The key thing about buckets is that they all contribute to our individual net worth. It doesn’t matter if you are spending money from your checking account or from your savings account, your net worth still decreases by the amount spent. This is why I always suggest that investors factor in all of their accounts when determining their asset allocation. Regardless of how you mentally segment your accounts, they all contribute to your net worth.

This is not to say financial buckets are a bad thing; used correctly, they can actually help you achieve your financial goals. Noelle Fox of the Principal Financial Group thinks retirees in particular could benefit from using buckets to allocate their portfolios. Specifically, she suggests that retirees may feel more confident about having enough savings to last throughout their lifetime if they segment their portfolios into short-term, medium-term and long-term buckets. Each bucket has its own allocation strategy, ranging from being conservative to focusing on growth. You can learn more about this strategy here.

I realize that part of portfolio planning for many retirees is ensuring there are assets to pass along to their heirs. When thinking about how you would like your estate distributed, you should consider the emotions of your heirs. The reason is that personal feelings, some of which you may not even be aware of, can often result in conflicts—and even lawsuits—over your estate. Elder law attorney Mark Accettura says these conflicts can be minimized if proactive steps are taken. He gives 18 recommendations here.

Obviously, another part of estate planning is properly managing your investments. To assist you, we have three portfolio strategy articles in this issue.

The first covers investing in currencies. Currencies are an alternative asset class with different return characteristics than stocks or bonds. They can also be less volatile than stocks or bonds. Axel Merk gives a great overview of investing in the currencies here.

The second suggests updating modern portfolio theory (MPT) to incorporate behavioral finance. Though MPT has been used for decades to determine portfolio allocations, Greg Davies of Barclays Wealth and Arnaud de Servigny of Deutsche Bank Private Wealth Management argue that allocation strategies need to be flexible enough to account for changing market regimes and investor tolerances for risk. Davies and de Servigny expound here.

The third addresses the long-standing question of whether it is better to dollar cost average (invest a fixed amount at equal intervals) or lump-sum invest (invest all at once). To find an answer, Sam Stovall of S&P Capital IQ ran the numbers to see what would have happened to investments made in the stock market starting on December 31, 1999. The results appear here.

First Cut is back with AAII President John Bajkowski seeking companies that exhibit high sustainable growth. These are companies that generate strong returns on equity and retain a high percentage of their earnings. The 30 that made John’s screen are listed here.

Those of you who use technical analysis will want to read author Michael Thomsett’s article on candlestick charts. Thomsett gives a primer on how to use candlesticks and describes the three formations most likely to signal a reversal in price trends here.

Finally, I am happy to share some good news: Our Model Shadow Stock Portfolio is at an all-time high. AAII Founder and Chairman James Cloonan discusses the portfolio’s performance, gives his outlook for the market and explains his rationale behind the most recent most buy and sell transactions (three stocks were replaced) here.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

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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