Site Mechanics
See latest changes to the model portfolio
Get notification of portfolio changes
See actual buy and sell prices
Model Shadow Stock Portfolio list versus the Shadow Stock Ideas
How often the Shadow Stock Ideas list is updated

Implementing the Portfolio
How to get started
Using AAII’s Stock Investor Pro to find shadow stocks
How much money should be invested
How to choose your starting 10 stocks
Diversifying your stock picks
Why many qualifying stocks are trending down
Best way to place orders when buying small stocks
Handling spreads in small stocks
Choosing a broker
What to do if stock price moves up when buying
Is there a mutual fund that follows the model?

Portfolio Management Issues
Stocks that no longer show up on Portfolio or Ideas lists
Stocks bought between quarterly reviews
Holdings that are losing money
Buyouts
Delistings
Handling dividends
Rebalancing your portfolio

Site Mechanics

Where can I see what stocks have been added to and removed from the Model Shadow Stock Portfolio?
Changes are made to the Model Shadow Stock Portfolio four times a year. The Transaction History link shows the stocks that have been bought and sold each quarter along with the date. Changes are also reported in the AAII Journal in the January, April, July and October issues.

When are changes made — when do I get notified of changes?
The portfolio is reviewed once each quarter to see if any stocks meet the Sell Rules. New stocks are added to the portfolio at the same time with the proceeds from selling stocks. Changes to the Model Shadow Stock Portfolio are announced in a special email sent out near the time of the change (the beginning of March, June, September, and December). Changes are also posted to our website on the 15th of each month and discussed in the regular monthly Update email that is sent out at the same time. Sign up for the free AAII Model Portfolio Update email by going to www.aaii.com/email.

Do you show the dates, prices bought and sold, and quantities for the stocks in the Model Shadow Stock Portfolio?
While this is not intended as an advisory letter and those details should not enter into your decision process, you can see detailed transaction data at the Transaction History page.

Why aren’t all of the Shadow Stock Ideas part of the Model Shadow Stock Portfolio?
The Model Shadow Stock Portfolio is the list of stocks that are actually being held based on carrying out the management rules; it is used to calculate the performance of the Shadow Stock Portfolio. The Model Shadow Stock Portfolio is reviewed four times a year (see the Transaction History). At that time, if any stocks meet the portfolio’s sell rules, they are sold and new qualifying stocks are purchased with the proceeds. The Shadow Stock Ideas is simply a list of stocks that currently pass the purchase rules (called “qualifying”) and is updated daily. Many members use the Shadow Stock Ideas list as a starting point for building their own Shadow Stock Portfolios.

When is the Shadow Stock Ideas list updated?
The list of Shadow Stock Ideas is updated each morning, using data as of the previous day's close. The data shown for each stock is updated throughout the trading day, on a 15-minute delayed basis.

Implementing the Portfolio

How do I get started using the Model Shadow Stock Portfolio?
The User’s Guide explains how to build your own Shadow Stock Portfolio. The rules for buying, selling and managing the portfolio are found here.

Is the Shadow Stock Portfolio included in AAII’s Stock Investor Pro screening software?
Yes, subscribers to AAII Stock Investor Pro can run the Shadow Stock screen by choosing *IISSP (Shadow Stock Screen) from the list of preprogrammed screens.

How much money do I need to invest in the Model Shadow Stock Portfolio?
There is no recommended amount of money needed to build the portfolio. The portfolio rules recommend investing in at least 10 stocks to start and putting equal dollar amounts in each stock.

How do I choose the 10 stocks?
Since the Shadow Stock Portfolio is not an advisory service, it assumes that you are doing further analysis on your own before investing. You can use the list of Shadow Stock Ideas as a starting point—these are all the stocks that currently meet the purchase rules of the Shadow Stock Portfolio. As you investigate the stocks, you may come across reasons to eliminate some, and you can devise your own methods for winnowing the list. If you are looking at stocks in the Model Shadow Stock Portfolio, you will want to avoid any that are approaching a value or size limit or are on earnings probation (shown in the Notes column), as these may be dropped from the portfolio at the next quarterly review. If you are selecting among qualifying stocks, ranking the selections by price-to-book-value ratio or bid-asked spread are good approaches.

If there are more than enough stocks on the qualifying list should I choose by trying to diversify by industry?
It is better to choose by lower price-to-book-value ratio if the difference is meaningful (0.10 or more—i.e., 0.60 vs. 0.49). If they are close, it is better to choose based on liquidity and narrowness of bid-ask spread. Industry diversification is only partially effective, but if there are virtual ties across all the stated purchase criteria you can use any criteria you like, and industry diversification is fine.

It seems that many of the stocks qualify because they are in a price downtrend. Isn’t that contrary to momentum theory?
Yes, the Shadow Stock approach is partly a contrarian approach. Prices go down for various reasons. Companies in a death spiral are avoided by requiring positive earnings, which usually gives the company time to turn around. Many price downtrends are due to the stock or industry being out of favor or due to a temporary problem. In these cases, which are by far the majority, a turnaround is anticipated and it is often dramatic.

If I invested only $10,000 per stock that would amount to a substantial portion (1% to 35%) of the stock’s average trading volume. It seems to me that this may have a substantial effect on the market for a stock when I went to buy and, more importantly, to sell. Do you have any suggestions?
It does require some effort and patience to establish sizeable positions. In the Model Shadow Stock Portfolio, a month is usually taken to place all the orders and an effort is made to try to sell on up days and buy on down days. Often a position is bought in segments. The extra (deep discount) commissions are less than the spread savings.

Often it is difficult to get executions at the recommended spreads. What do I do?
Be a little patient. Buy on down days and sell on up days. The portfolio’s recommendations are sometimes violated for the Model Shadow Stock Portfolio holdings; and the portfolio’s results are in spite of bidding a little higher. Also, don’t measure spreads based on the fake ones when the market is closed.

Is there a brokerage firm that AAII would recommend for the Shadow Stock Portfolio?
There is no particular broker recommended, but you may want to use a discount broker to minimize commissions. AAII publishes a Discount Broker Guide that lists the services of the most popular firms to help you compare them. Go to this link for the most current Discount Broker Guide.

If a stock starts to move up as I buy it, how high can I let it go?
Sometimes it is OK to chase a stock a bit, but a price-to-book-value ratio of 1.10 should be the maximum.

Does AAII or some other company track the Shadow Stock Portfolio as a mutual fund?
No. The Shadow Stock Portfolio is meant to provide a framework for investors who are interested in investing in small-cap value stocks.

Portfolio Management Issues

I bought two stocks based on the Shadow Stock recommendations. Now, I cannot find them either in the Model Shadow Stock Portfolio or in the Transaction History. Why is this?
The Model Shadow Stock Portfolio is a real portfolio that is only changed change quarterly, and only the stocks that make it into the Model Shadow Stock Portfolio are followed up on. There are two ways you can wind up with stocks not in the Model Shadow Stock Portfolio. If you are looking at the list of Shadow Stock Ideas—stocks that would qualify if purchases were being made today—these stocks may cease to qualify before the next quarterly portfolio review. This usually happens because a stock has gone up too much in price to meet the price-book ratio requirement, but occasionally it happens when a negative earnings quarter is announced before our buying period. The second way you would end up with a stock not in the Model Shadow Stock Portfolio is when there are more stocks that qualify as buys than there are funds for. It is a good idea for individuals to buy stocks when they qualify and when members have available funds. But it is up to each individual to monitor such stocks themselves to see when they should be sold under the portfolio rules. This can be done quite easily with AAII’s Stock Investor Pro software program or at a website such as at Yahoo Finance where price-book ratios and quarterly earnings are provided.

The model portfolio is only updated once a quarter. If I make a purchase between quarters and then because of a change in the stock the model portfolio does not buy the same issue how do I know what to do with the stock in the future?
Independent action is encouraged. But if you make a purchase that the model doesn’t, you must use the same analysis tool (AAII’s Stock Investor Pro or another service) you used to qualify the purchase to analyze when to sell it according to the portfolio rules.

Four of my holdings have lost money since I purchased them. Your sell rules do not cover sale of stock at some level of loss to protect overall portfolio returns. Do you have guidance?
Unless a sell has been indicated, all of the stocks in the Model Shadow Stock Portfolio are still considered worth holding. Stocks are not sold on price movement alone, although price changes can be a warning to look for something else. A drop in price can mean either the fundamental performance is weak and may get weaker, or that the stock has had temporary problems or is out of favor and is now on sale. In the case of Shadow Stocks, it has been the latter more often than the former. Stocks are held until they violate the portfolio’s criteria.

How do you handle proposed buyouts in the Shadow Stock Portfolio?
Since the model portfolio only acts quarterly, nothing is done in many cases because the buyout is complete by the time the review period arrives. If the board has approved a buyout and it seems firm, the discount is examined. If holding the stock until the buyout is complete will yield over 1% a month, the stock is held; otherwise, it is sold. This is mitigated if there are number of stocks to buy but not enough funds to purchase them all. In this case, the stock would be sold unless it was yielding 1.5% a month.

If a company I hold is bought out by another company for stock should I hold that stock?
Not unless it qualifies as a buy, which would be unusual. However, if you are close to a long-term gain, there probably is no reason to rush.

What should I do if a stock I hold is delisted?
If a company is delisted it would be held it until it violates a sell rule, even if it is a bulletin board or pink sheet stock. However, a company that indicated that it looked like their finances were such that it would be in violation of portfolio rules, it would be sold even before the official filing. This would occur if they indicated a past year and following quarter were going to show negative earnings. In the model portfolio actions are only taken quarterly, but individuals are free to make changes anytime.

Should dividends be reinvested when using the Shadow Stock Portfolio?
You can take out or reinvest dividends based on your needs. Reinvestment is assumed in the calculation of portfolio returns, and dividends from the Model Shadow Stock Portfolio holdings are reinvested.

Should I rebalance my holdings?
The only rebalancing done is when new stocks are bought or when a bit more of underweighted stocks that still qualifies is bought with extra cash. Generally, the sell rules will take care of rebalancing. When you add new stocks, buy a quantity equal to the average of your holdings.