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Tracking the Model Shadow Stock Portfolio

Comments posted to “Adherence to Rules Helps Model Shadow Stock Portfolio’s Performance,” by James B. Cloonan, in the October 2012 AAII Journal:

I’ve wondered whether the dividend-paying stocks in the Model Shadow Stock Portfolio perform differently over time than the non-dividend-paying stocks. Has anyone tried a dividend-paying sub-portfolio of the shadow stocks or have you any thoughts on dividend vs. non-dividend among shadow stocks?

—Lee from New York

James Cloonan responds:

We have not looked at dividends as a criteria and so have not separated them out for separate evaluation. If there are enough, we could check them out to see if dividends would make a good sub-criteria or tiebreaker. We will look at that. There aren’t enough for a separate portfolio.

For someone joining today, it seems late in the year, particularly with many stocks near their highs, to throw new money in except for your new picks in the Model Shadow Stock Portfolio. What are your thoughts?

—Alice Brien from Colorado

Charles Rotblut responds:

The Model Shadow Stock portfolio is designed to be a long-term portfolio. We suggest members start following it when they are ready to do so, with the intent of riding out any downside moves. The portfolio’s great long-term performance comes from staying fully invested, and not from trying to time market moves.

Target Funds and the Risk-Averse

Comment posted to “Target Date Funds: A Simple Premise, but Underlying Complexities,” by Charles Rotblut, CFA, in the October 2012 AAII Journal:

I agree with relatively high stock allocations of target retirement funds at the age of 65, such as the Vanguard Target Retirement Fund 2015 with 56% in stocks, because of increased life expectancy and inflation.

However, I am a Boglehead (people who follow John Bogle, founder of the Vanguard Group) and Bogleheads are very risk-averse, not only in believing in only index funds, but also in asset allocation using bonds (“age in bonds” up to 80% at 80). Many would not consider entering retirement at 65 with a 60% stock portfolio. When all the target retirement funds you used as examples went down 38%–43% in 2008, how do you ameliorate these people’s fear of volatility and get them to “stay the course” in a target retirement fund?

That exact topic was the subject of the Coastal Carolina AAII investment education group meeting on October 10.

—Gordon Robinson from North Carolina

Underperformance in Mutual Funds

Comments posted to “How Investors Miss Big Profits,” by Louis Harvey, in the October 2012 AAII Journal:

I am on the board of a major state pension fund. We have found this underperformance to be true for people who run their own investments in our defined-contribution plans. The defined-benefit pension plan also does much better because of the pooled longevity risk. A pension plan never gets old, so it can keep a “young” asset allocation forever.

—Bob Stein from Ohio

Great article. We are in it for the long haul, and put as much extra money in as we can during down times. It wasn’t always like that, though. Years ago, we stopped putting in during a down time. After the fact, I went back and figured out how much further we would have been ahead had we continued our monthly investing. It was amazing and shocking to see the results.

—Kim Bedell from North Carolina

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Correction: 401(k) Catch-Up Contribution Age

Comment posted to “Setting Up and Managing Your 401(k),” by Charles Rotblut, CFA, in the October 2012 AAII Journal:

You wrote: “If you are age 55 or older, you can also contribute an additional $5,500 as a catch-up contribution.” While the catch-up contribution amount is correct, in 2012, I believe the age should be 50 or older.

—Donald Rome from California

Charles Rotblut responds:

You are correct. Individuals can start making catch-up contributions at age 50, not age 55, as I mistakenly wrote. We should have caught the error before publication. The online version of the article has been updated to show the correct age.


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