Adherence to Rules Helps Model Shadow Stock Portfolio's Performance

by James B. Cloonan

Adherence To Rules Helps Model Shadow Stock Portfolio's Performance Splash image

The slide that began in May has finally been reversed at the end of August, and the entire stock market is back at its high for the year.

The Model Shadow Stock Portfolio has done particularly well recently and is now up 18.9% year-to-date, compared to 13.4% for the S&P 500 index as measured by the Vanguard 500 Index fund (VFINX). We have not gotten back to our mid-March high of +22%, but it is an above-average year—so far. The returns for longer periods can be seen in Figure 1 and Table 3.

Not much has changed in the market environment. There seems to be a gradual recovery amid a wide variety of risks. In addition, the political rhetoric has hit full volume and will continue through the election, which happily will be over when I next write about the Shadow Stock Portfolio.

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James B. Cloonan is founder and chairman of AAII.


Alice Brien from Colorado posted about 1 year ago:

For someone joining today it seems late in the year and with many stocks near their highs to throw new money in except for your new picks in the Shadow Portfolio . Your thoughts.

Charles Rotblut from Illinois posted about 1 year ago:


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.


Erik Wolf from Connecticut posted about 1 year ago:

The new stocks bought were bought on August 31 approximately one month before the fourth quarter? It says the portfolio is balanced quarterly. What months an dates do u make changes to the portfolio? As someone new to aaii, would the best way to mock the portfolio should I just buy the stocks that the portfolio buys quarterly? So I would only start out with whatever is being added each quarter? I also think that doing this in the Roth IRA would be better for tax reasons, correct?

Erik Wolf from Connecticut posted about 1 year ago:

Also. How do u keep equal dollar amounts as the portfolio grows. Do you just put equal amounts of the sales that u made from previous stocks? Won't that cause over weighting in some stocks as you add to the portfolio.

J Fretty from Wisconsin posted about 1 year ago:

In 2008, the decline of your model portfolio (50.8%) was much greater than that of the Vanguard Small Cap Index (36%). I tend to believe this was mainly due to the fact that the VSCIndex companies had on average much higher capitalization (small cap v. micro cap), and so were less impacted by the liquidity crisis. My question is whether, because of a liquidity crisis crash such as 2008, the model portfolio is forced by its rules to sell its lowest cap stocks at a time when it might be (from an active manager's point of view)the worst time to sell.

Lee from New York posted about 1 year ago:

I've wondered whether the dividend paying stocks in the shadow stock portfolio perform differently over time than the non dividend paying stocks. Has anyone tried a dividend paying subportfolio of the showdow stocks or have any thoughts of dividend vs non dividend among shadow stocks?

Charles Rotblut from Illinois posted about 1 year ago:


Because we manage the portfolio internally, as opposed to operating a fund, we do not have to liquidate the portfolio because of market conditions.

With micro-cap stocks, it can be more advantageous to buy the individual stocks directly as opposed to investing in a fund because an individual investor does not need to liquidate his portfolio during bear markets. A fund, conversely, may face an increase in redemption requests at the worst possible time.


Charles Rotblut from Illinois posted about 1 year ago:


We update the portfolio and announce any changes to it on the 15th of each month. You can sign up for a monthly email alert by going to and clicking on the "Sign Up Now" button near the top right-hand section of the page.

The goal for the reinvestment is to invest an amount equal to the average holding size of all positions. When a stock is sold at a significant profit, two or more new stocks may be added with the proceeds.


Donald Dyson from South Carolina posted about 1 year ago:

You suggest starting with 10 stocks, but, if I understand the chart, there are only 8 qualified as buys. Would I start with those 8 and add more as they qualify?

James Cloonan from Illinois posted about 1 year ago:

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. Jim

Ray Beall from Texas posted about 1 year ago:

Starting the portfolio new should stocks be averaged in over a period of time or all at once. If over a period , how long?

Erik Wolf from Connecticut posted about 1 year ago:

I have been looking over many of the discussions in regards to the shadow stock portfolio and the big question is how to start your own shadow portofolio. I have this same question. The two answers are either to a) Buy the new stocks that are added to the portfolio or b) Buy all the stocks in the portfolio. The second seems the best to model the returns. The problem is you will buy some that have run up signifigantly. The answer seems to be quit simple. By the same weight % that the model portfolio has in each stock. This way you will be in the same position as the model portofolio. The problem is you don't have a colomn with the weight % of each stock. Could you please put up a colomn that has the weight % of each stock. This way if someone starts with 20k or 100k it won't matter that much. They will by 2% of this stock and 6% of that stock and be in the same position as the model.

Alpha Mean from New York posted about 1 year ago:

market is where it was at 5 years ago.

Per Bloomberg today:

The S&P 500 is trading at 14.5 times earnings, compared with an average income multiple of 16.4 over the last five decades, based on data tracked by Bloomberg.

The Standard & Poor’s 500 Index may climb to a record 1,575 next year, Goldman Sachs Group Inc.’s David Kostin predicts, joining four other Wall Street firms in forecasting the benchmark gauge will exceed its 2007 peak.

Alpha Mean from New York posted about 1 year ago:

I also would love to hear more about allocation recommendations that Erik inquired about above.

If investing 10k, 20k.. what would the best allocation be using shadow..

Paul Vasdekis from Illinois posted about 1 year ago:

I have a hard time understanding the following Sell criteria for stocks at the Shadow portfolio especially the subsequent. If last 12 months’ earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings from continuing operations becoming positive, the stock is sold.

Many thanks

Cleo Townsend from Florida posted about 1 year ago:

A big question continues, how to get started in the Shadow Portfolio,, Please suggest some guidance for the $20K investor. Thanks...

Charles Rotblut from Illinois posted about 1 year ago:

Hi Cleo,

We suggest that you select at least 10 stocks. Choosing stocks in different sectors will provide added diversification and protect your portfolio from some sector volatility. A good place to start is with those companies listed as qualifying since they currently the criteria for being added to the portfolio.

With a discount broker, your fees for buying each stock should not be more than 0.5% of your total investment. If you use a broker that charges less than $10 per trade, your costs as a percentage of your investment will be less.


David Flanagan from California posted about 1 year ago:

Thinking of following the shadow portfolio only. How do you advise members when making changes , or recommendations? Also will the market do better if Romney is president. Thanks for your reply,

Charles Rotblut from Illinois posted about 1 year ago:

Hi David,

You can see updated performance and a list of any changes in one of three ways:
1. Sign up for our monthly Model Portfolio Update email. You can subscribe this and other AAII newsletters by going to or by simply clicking on "Member Benefits" at the top of this page and then clicking on the red, "Sign Up" button on the right-hand side.

2. Updates to the Shadow Stock portfolio are published in the AAII Journal four times a year.

3. Updated performance and transactions are posted on typically on the 15th of each calendar month. Just visit the Model Portfolios section.


Erik Wolf from Connecticut posted about 1 year ago:


I want to thank you for all your help thus far. The question still remains about getting started with the portfolio. If you could tell us the total amount in dollars for the portfolio then we could take the amount in each stock and create a percentage. This probably could be done on a continueing basis on your end. Just take the total amount in the portfolio then the total amount for each stock and we can get a percentage. I'm very eager to start this portfolio and I also plan on possibly following the super star portfolio too. I would like to get this shadow started first and get comfortable with this first before doing anything else.

Charles Rotblut from Illinois posted about 1 year ago:


You will want to divide the amount you plan to invest equally among all of the stocks you wish to purchase.

As a simple example, say you wanted to invest $100,000 and you wanted to buy all 29 stocks in the portfolio. You would invest approximately $3,450 in each stock ($100,000 / 29 = ~$3,450).


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