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Revised Model Fund Portfolio

Comments on “Revised Model Fund Portfolio: Combining Mutual Funds and ETFs,” by James B. Cloonan, in the August 2012 AAII Journal:

Well thought out. Particularly note the thinking on international. From time to time international, notably emerging markets, may afford trading opportunities when these stocks get very cheap, (i.e., after the emerging market debacle in 1998).

—Maureen Oster from Wisconsin

Do you have any thoughts about using stop-loss/re-entry orders in conjunction with the model portfolios? Would it have proved beneficial on balance and not just in

—Ron Compton from Missouri

James Cloonan responds:

I am not a big fan of stop-loss orders in general, especially for micro-cap stocks, since a slow day can result in a 10% move in both directions due to a wide bid/ask spread. In addition, a down move does not violate any of our sell rules and may indicate more reason to buy than to sell.

A Fund of ETFs

Comments on “The Individual Investor’s Guide to Exchange-Traded Funds 2012,” in the August 2012 AAII Journal:

My portfolio includes a grouping of ETFs under the title ETF Market Opportunity (ETFOX).

I subscribe to Barron’s, and I cannot locate this ETF anywhere in the magazine. It seems to be a strange hybrid. Are there other ETFs like this? Morningstar shows it as a 5-star fund. However, contrary to other ETFs, it has a 2.06% expense ratio, which is very high, and the return is not particularly good for a large growth stock investment. May I have your thoughts please? Thank you.

This article was very informative and I plan to print it out for further study.

—Robert Burtness from Minnesota

Charles Rotblut responds:

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ETFOX is not an exchange-traded fund. Rather, it is a mutual fund that invests in ETFs. You are paying the high expense ratio in hope that the mutual fund manager is able to put together the correct mix of ETFs over the long term.

Keep in mind that the fund has to beat its benchmark by 2% each year just to get you a return similar to what you would be able to get by simply investing in a diversified ETF, such as the SPDR S&P 500 fund (SPY) or the Dow Jones U.S. Index fund (IYY).

Taking Issue With Indexing

Comments on “Behavioral Errors Hurt Your Returns,” an interview with Daniel Kahneman, in the July 2012 AAII Journal:

I am a huge fan of Professor Kahneman and the work he has done over the last 30 years. He has incredible insights into psychology and how it impacts investor behavior. I only suggest that he may be a bit too overconfident in his conclusion that all individual investors should index. Rather, I think that individual investors should take his research seriously and develop systems to guard against the biases that he elucidates. It would seem that his research could lead to opportunities as well as pitfalls.

—Charles Strout from New York

Suggesting people buy an index fund instead of stocks isn’t the answer, either. Yes, index funds are “safer.” But, like anything else, when to buy and when to sell is very important. But Kahneman makes it sounds like it’s a no-brainer.

The answer is proper education in how to pick stocks, an index fund or any other investment. The stock market is the only thing I know where people will put thousands of dollars at risk without doing a single thing toward educating themselves.

As one who is in investment education, I am constantly hearing people say, “I don’t want to spend all that time to learn how to do it. I just want to know where to put my money.” I tell them, “In that case, put it in your pillowcase, it&rsquo

—Kermit Prather from Florida


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