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Letters to the Editor

Letters

Join the discussion on ideas ranging from investment fraud and bond laddering to the MACD indicator and contrarian investing.

by AAII Staff | August 2019

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Protecting Against Investment Fraud

Comment on “Avoiding Becoming a Victim of Investment Schemes,” by H. Kent Baker and Vesa Puttonen, in the July 2019 AAII Journal:

Utah has an online registry of individuals (with pictures) convicted of white-collar crime and fraud. It does not include those convicted in federal court. I don’t know if other states have similar registries, but these registries should be checked every time before investing. See www.utfraud.com/home/registry.
—Mike Deamer from Utah

Laddering, and Government Agency Bonds

Comments on “Challenge Your Perspective on Bonds,” by Hildy Richelson and Stan Richelson, in the July 2019 AAII Journal:

I have been maintaining a 10-year bond ladder for over a decade, equal investment by year though. A couple of takeaways for me: 1) think of triple B as equity, and 2) even though I’m older I should consider extending the ladder.
—Andrew Jacknain from Washington, D.C.

In your Types of Bonds listing you did not include agency paper, such as TVA, Federal Home Loan Bank, Federal Farm Credit Bank, etc. Are you familiar with these bonds which are taxed the same as Treasury bonds, state tax exempt while federally taxable? They are generally rated the same as U.S. Treasury bonds.
—Shelly Frank from Connecticut

Stan Richelson responds:
Shelly, thank you for your comment. You are correct that another major type of bonds that should be considered by investors is U.S. government agency bonds. Agency bonds are a very good credit (although not as liquid as Treasury bonds) and yield more than Treasury bonds. One thing to be careful of is that while some agency bonds are state tax exempt, all agency bonds are not.

Technically Digging Deeper

Comments on “Moving Average Convergence/Divergence (MACD): A Combo Indicator,” by Wayne A. Thorp, CFA, in the July 2019 AAII Journal:

I must admit that I don’t consider myself a “technician” when it comes to investing, for a variety of reasons; therefore, I’m not a good audience for this article. It’s not the math; I’m an engineer and a medical device designer, so I’m very comfortable with mathematics and statistics. However, I simply don’t see the point. Nobody has ever clearly explained to me WHY past price information portends future price movements.

I’m reminded of Larry Swedroe’s discussion of factors: A factor must provide explanatory power to portfolio returns, be tested out of sample and be pervasive in different markets and around the world. I have never seen an out-of-sample test, e.g., showing premium performance compared to other methodologies.

Technical articles always seem to focus on how but rarely on large-scale results. There are obviously many, many ways to manipulate data. Statisticians are fond of saying, “You can torture the data until it tells you anything you want.”
—Paul from Oregon

Paul, the way I look at it, there are a bunch of people trading based on technical indicators (I am not one of them), so if I am thinking of buying or selling a stock I may look at one or two technical indicators to see how the traders are trading the stock. If there are enough people trading based on technical indicators, then it makes no difference if I believe in the indicator or not, because the traders believe they work and will act accordingly most of the time.
—David from Colorado

Possible Falling Knives

Comments on “Why Contrarian Investors Should Treat Falling Knives With Skepticism,” by John Stepek, in the July 2019 AAII Journal:

Thanks for the article—Buffett has written that “turnarounds seldom turn.” I’ve had Bausch Health Companies Inc. (BHC) do well the past few years but have more laggards lately in Newell Brands Inc. (NWL), Kraft Heinz Co. (KHC) and Adient PLC (ADNT). On to greener pastures!
—Ryan Fuhrmann from Indiana

I wonder, is this piece—excellent as it is—more about smaller companies than larger ones?
—Fred from Florida

Discussion

Joe from Houston from TX posted over 6 years ago:

I read the August 2019 Journal article on "Using Portfolio Returns to Determine When to Claim Social Security Benefits" with interest. It was quite timely as I had just gone thru the cash flow / nest egg analysis for my wife and I and discovered a few points that I would like to share. We plan to start next year when I turn 67 and my wife turns 66. She does not have sufficient SS earnings to claim on her own work history, so we will claim both in 2020. First and foremost, the way I read the SS rules, my wife's 1/2 of mine is the value of my SS benefits at the age of 66 not 1/2 at 70. Assuming that's the case and we cannot do "file and suspend", we give up 3-4 years of her benefits as there would be only minimal increase in her benefit to wait until 70 years old. This would suggest filing earlier than 70. Second, I found that it really depends which accounts the money is coming from that would substitute for the lack of SS benefits until 70. If it comes from pre-tax accounts (my case, maybe not to others), then the tax differential needs to be factored in between IRA distributions that are fully taxable to SS benefits that are 85% taxable. Rather than holding expenses constant between cases, I held Adjusted Gross Income (AGI) constant and allowed expenses to vary with the tax delta. This may not make a difference for other families, but is did for us. What I found (I did not do Monte Carlo, but made conservative assumptions) was my breakeven between 66 and 70 on the nest egg was at 88 years old. It didn't make much sense to wait until 70 in my case even though the article suggested that I should.


Gene from WA posted over 6 years ago:

Joe from Houston, we are taking a bit of a different tack. I'm not sure what "She does not have sufficient SS earnings to claim on her own work history, . . ." means. If this means she does not have 10 years of work credit, she cannot collect on her own. However, if she has 10 years or more, she can still collect SS in her own name. SS is heavily weighted to lower incomes. Meaning the first roughly $11K/year is replaced at 90%. Therefore, even if a spouse has more than 10, but not the 35 years the SS is based upon, there can be worthwhile income. Since my wife had worked approximately 20 years, much part time, she had a low recordable SS income, but significant as a fraction of the 1/2 she will get based upon mine. So, we used a strategy where - once she reached full retirement age - she started drawing on her own SS. I can draw on hers also, while mine continues to accrue until I reach age 70. This strategy has a sunset date, which I've forgotten, so although I believe it is still available, it may not be for very much longer. I had to file a "restricted application" which allowed me to collect on my wife's SS. We're only getting about 1/3 as much as if we would have begun taking SS for both of us at full retirement age, but I concluded the inflation protection of SS has some additional value and we can reduce the size of our taxable IRAs during this time by rolling them into Roth IRAs which should have benefits later.


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