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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

This month’s decision to use a snow-covered path on the cover wasn’t solely due to the calendar. We wanted to convey the image of a road less traveled.

Investing is about choices and for many investors choosing the known path of tracking traditional well-known indexes like the S&P 500 index works well. It is not the only path to investing success, however, and I think it is good to be aware of your options. This way you can make an informed choice about whether a particular strategy makes sense for your portfolio or not.

The first alternative strategy is Harry Browne’s Permanent Portfolio. Browne based his strategy on the concept of diversification. Four asset classes with different return characteristics—stocks, bonds, gold and cash—make up the portfolio. Craig Rowland and J.M. Lawson, who wrote a new book about the strategy, explain the logic behind the portfolio and provide suggestions for implementing it here.

The second strategy involves the use of smart betas. Smart betas are alternative index strategies based on methodologies such as equally weighting component companies by market capitalization. This reduces the influence large companies have on an index’s returns. Jason Hsu, Vitali Kalesnik and Feifei Li of Research Affiliates, which creates its own smart beta strategies, discuss the advantages and disadvantages here.

A question facing those of you nearing retirement is whether or not to annuitize your savings. If you have a pension, you may be forced to choose between accepting a lump-sum payout at retirement or a monthly payment for the remainder of your life. There are pros and cons to both options. Rande Spiegelman of Schwab sheds light on the decision process starting here.

Speaking of retirement, a member asked me if it made sense to use the Internal Revenue Service’s required minimum distributions RMD as the basis for a retirement portfolio withdrawal strategy. The RMD is the amount the IRS requires you to withdraw annually from your traditional IRA, 401(k) plan or similar retirement plan. (The tax code excludes Roth IRAs from RMDs.) While researching the topic, the Center for Retirement Research at Boston College coincidently published a brief about it. Their findings appear here.

Switching to stock analysis, AAII’s Joe Lan shows you how to determine how effectively a company is generating value for its shareholders. The DuPont model breaks down return on equity ROE into its components, enabling an investor to see how effectively management is utilizing the company’s assets. This latest article in Joe’s series on Financial Statement Analysis starts here. (I’m proud to announce that Joe was recently awarded the right to use the Chartered Financial Analyst designation. Congratulations, Joe!)

Regardless of the characteristics you seek in a stock, whether they include ROE or other criteria, a stock screen can help you identify companies that match your investing objective. A good stock screen not only considers your primary criteria, but can go a step further to weed out those companies that don’t embody your objectives. AAII President John Bajkowski offers a framework for building a winning screen here.

Since January often brings New Year’s resolutions, I thought you would find it useful to read suggestions on how to invest better. This is why I’m including an excerpt from The Forbes/CFA Institute Investment Course. Though the book’s primary focus is on how to build a good stock portfolio, it includes a list of investment rules and advice. These tidbits appear here.

My latest Beginning Investor column is based on a question posed by a member: Is it better to buy bonds or bond funds? The answer is not simple or straightforward, as I elaborate here.

Finally, as we went to press two days before Thanksgiving, Congress had yet to agree upon a resolution to the pending fiscal cliff. This is why our annual tax guide has been pushed to January’s issue. Hopefully, we’ll have clarity on 2013 taxes before we go to press in mid-December.

On behalf of everyone at AAII, happy holidays,

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/CharlesRAAII.


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