Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

Next month, we will be holding our 2013 Investor Conference in Orlando. (Visit www.aaii.com/conference for more information). Ahead of the conference, I am including articles from two of the speakers: Christine Benz and James O’Shaughnessy.

Christine gives guidance on using a bucket strategy to manage a retirement portfolio. A bucket strategy involves segmenting your portfolio by time. For a retiree, or a soon-to-be-retiree, this typically involves three buckets. The first is short-term, three to five years, and holds cash, certificate deposits and the like. The second bucket goes out to 10 years, or slightly longer, and holds bonds and high-quality income-producing stocks. The third bucket goes out farther in time, holds more aggressive stocks and is intended for growth.

I think the bucket strategy is a good approach for coping with short-term uncertainty and the long-term risks of inflation and longevity risk (the risk of outliving your savings). You can see Christine’s article here.

James is the author of “What Works on Wall Street” (4th Edition, McGraw Hill, 2012), which I keep on my bookshelf and refer to often. In his article, Jim focuses on what characteristics are associated with better-performing stocks. Notice the use of the plural. Jim’s research has found that no one single indicator delivers outperformance all the time. Rather, to achieve consistently better returns, a combination of indicators is required. Jim shows the composites he has found to work well here.

Composite indicators are the subject of this issue’s stock screen. AAII president John Bajkowski discusses a strategy for determining which highly value growth stocks are more likely to do well in the future. Go here to learn more.

Our Model Shadow Stock Portfolio also relies on a combination of indicators, specifically low value, small market capitalization and profitability. AAII founder and chairman James Cloonan recently sold one stock and used the proceeds to add two more stocks. He discusses the changes and how to reduce the negative impact from the wider spreads that the Shadow Stocks trade with here. Here’s a hint: Trade less often.

Keeping expenses low has long been a point of emphasis for Charles Ellis. His great book, “Winning the Loser’s Game” (6th edition, McGraw Hill, 2013) is another text I strongly recommend. Anyone who has read Charley’s writings or heard him interviewed knows that he believes keeping costs down is one of the keys to good long-term returns.

When I talked to Charley about contributing an article, he responded with something I think many of you will enjoy reading: a letter to his grandchildren on how to invest. It contains timeless advice for investors of any age, and it is an article I encourage those of you with children and grandchildren to share with them. Charley’s letter starts here.

Another article that came out of a conversation is from Christine Fahlund of T. Rowe Price. While discussing retirement planning, Christine explained to me why charitable trusts are a great tool for those who are philanthropic. She expounds in our latest Retired Investor column here.

New this month is the first of a three-part series on Social Security. William Reichenstein and William Meyer of Social Security Solutions, a service that provides personalized recommendations as to when to claim Social Security benefits, discuss the basics of claiming benefits here. In the next two articles, they will give claiming strategies for both singles and married couples.

Finally, in response to member requests, I take an in-depth look at defined-maturity funds. These are hybrid bond funds that terminate near a preset date. Though they do come with compromises, I think they can serve as an alternative for investors who prefer not to buy individual bonds. Go here for more information.

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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