Buy and Hold

Comments on “Dividend Aristocrats With Longest Streak of Dividend Increases,” by Derek J. Hagemen, in the March 2021 AAII Journal:

I was also interested in trying to track the Nifty Fifty stocks. I found them listed in one of your back issues of AAII Journal. I came away with a couple of observations: 1) many of those stocks have merged or gone out of business, and 2) the ones that I could find no longer have the brand image and thus are not the sought-after stocks that they were in their heyday. It also seems as though AAII Dividend Investing and the Stock Superstars Report portfolios have quite a bit of turnover. So I wonder what the long-term implications are for the buy-and-hold investor.
—John D. from Ohio

John, think General Electric Co. How could such a stalwart unravel? At its low it was worth ~5% of its peak and now is at about 12% with elimination of a solid dividend. Buy and hold does not equal set and forget.
—Ken P. from North Carolina

Building Your Shadow Stock Portfolio

Comments on “Shadow Stock Portfolio Outperforms Over the Long Term,” by John Bajkowski, in the March 2021 AAII Journal:

I’m just beginning to build my Shadow Stock portfolio and would like to know the maximum price to pay for each stock.
—Hugo S. from Illinois

Hugo, when you buy in, the price paid may seem high, but over time it could and should be low in comparison. Three months seems to be a short time horizon to compare if you are investing over the long haul as this portfolio is designed for buy and hold through many business cycles.
—James B. from Missouri

I’m new to AAII and would like to build my Shadow Stock portfolio. As I understand the rules, only three of the listed stocks currently meet the buy criteria. Is this correct, or am I supposed to purchase all stocks listed to have at least 10 stocks in my portfolio?
—Monte M. from Kansas

Charles Rotblut responds:
Monte, AAII founder James Cloonan used to suggest members buy only those stocks currently qualifying and allocate the remaining amount to either cash or a broad index fund until a new candidate qualifies.

As a very simple example of what Jim suggested, if you wanted to allocate $10,000 to the portfolio, you’d invest $1,000 in each of the three qualifying stocks and set aside the remainder until more stocks qualify.

Cost of Rebalancing

Comment on “Rebalancing Update: A Revised Allocation Plus Additional Insights,” by Charles Rotblut, CFA, in the March 2021 AAII Journal:

Very interesting article. Table 1 makes clear the very high cost of rebalancing. If an investor just bought the S&P 500 index and held it for the duration of this study, they would have an additional $1.3 million.
—J.M. from New Jersey

Bond Credit Ratings

Comment on “What Are Bond Ratings and Why Do They Change?,” by Hildy and Stan Richelson, in the March 2021 AAII Journal:

One important fact to keep in mind is that according to history, debt rated on a fundamental basis (such as corporate and municipal bonds) performs very differently than equivalently rated structured finance instruments (such as residential or commercial market-backed securities).

For example, credit losses on investment-grade-rated corporate bonds during the 2008 Great Recession were rare but much more common on rated structured finance securities with the same ratings, such as collateralized debt obligations. All the credit rating agencies publish data on the credit performance of their ratings in various asset classes on their websites.
—Arthur F. from New Jersey

Start Your Wealth-Building Process

Comments on “How Much Risk Can You Handle and Still Meet Your Goals?,” by Charles Rotblut, CFA, in the March 2021 AAII Journal:

How do I translate where I am in the table into an actionable strategy?
—Monk JR. M. from Texas

AAII editors respond:
Monk, this article is one step of a process designed to get you to an actual wealth-building plan that you can carry out. Please visit the Learn & Plan section of AAII.com to see the entire process. For each step, there’s a video, an article and a worksheet to help you complete the process.

I prefer conceptually, and on my Excel sheet, to consolidate my investments into a bucket strategy that delineates which holdings are for 0–5 years, 5–10 years and 10+ years. I allocate to equities based on which of the three groups I am reviewing. I reallocate yearly in January. The bucket method also helps keep me on my financial plan, as I worry much less about equity (and bond) principal changes in the longer-term accounts and have very little volatility in bucket #1 so I can sleep well at night.
—Craig B. from Wisconsin