Finding Your Investing Path

Comments on “How the World’s Greatest Investors Think,” an interview with William Green, in the May 2021 AAII Journal:

What great advice. I have my own to add: Never forget that for every five days the stock market goes down, it goes up six days. That one extra up day (one out of 11) represents the 9% long-term annual gain that every long-term investor receives from the total market. Be patient, time is always on your side.
—Gerald F. from Florida

I find that imitating others doesn’t help. Each investor has a different amount of money to invest and has a grasp of certain key ideas, time horizon and diverse market opportunities. Pick up the style and strategy that appeals and stick with it for life, frequent switching only blurs the finish line.
—Vaidy B. from Canda

Green discusses many fine investors but fails to mention the inventor of the “margin of safety” concept, Benjamin Graham—a serious oversight, in my humble opinion.
—Stephen P. from Colorado

Value of the Model Shadow Stock Portfolio

Comments on “Model Shadow Stock Portfolio Recovers Faster Than Market,” by John Bajkowski, in the May 2021 AAII Journal:

I examined the transactions of the Model Shadow Stock Portfolio and would like an explanation of all the sell transactions that occurred in March. It seems that you sold part of most holdings. How did this affect the return of the portfolio?
—Kenneth D. from Colorado

John Bajkowski responds:
The strong performance of the Model Shadow Stock Portfolio had pushed the market value of the portfolio well past $1 million. We have periodically reduced the size of the portfolio to better reflect the portfolio value that a typical investor might allocate to the micro-cap value investment sleeve. We noted the proportional weighting of each position (including cash) in the Model Shadow Stock Portfolio before the reduction in size and reduced each holding to maintain its proportional position after the portfolio was reduced in total value.

Target-Date Funds and the Market

Comments on “Key Considerations When Choosing a Target-Date Fund,” by Charles Rotblut, CFA, in the May 2021 AAII Journal:

Target-date funds are automated conventional wisdom. They reduce volatility as the retirement date approaches and potentially reduce the impact of a bear market in early retirement. But the cost of this reduced volatility on the size of the retirement nest egg and the time-limited impact of a bear market is rarely discussed. Just as the retirement nest egg gets significantly large, the compounding rate is reduced. A stock portfolio doubles in size in seven years at 10% (historical stock return average). At 5% in seven years, the portfolio increases by 140%.

If you are seven years from retirement and have a $1 million retirement nest egg, you will have $2 million at retirement at 10% and $1.4 million at 5%. There is a large cost of $600,000 in this case to following conventional wisdom.
—John L. from New Jersey

I keep a small amount in a future target-date fund, just so I can gauge what an aggressive 100% stock portfolio is returning. That allows me to evaluate if the main 60/40 portfolio is: 1) capturing 60% of stock gains; and 2) avoiding 40% of stock losses. I don’t expect perfection, but I should be making something when the market is going up, and I should be declining less when the market is going down. I can figure that out with numbers from my own investments. Keeps things simple, which suits me. You need some way to tell if you are roughly on the right track.
—John J.M. from Washington

What is the best way to account for a target-date fund’s expense ratio? Seems like with a fund of funds there’s a second layer of expense ratios.
—Walter D. from Utah

Charles Rotblut responds:
Walter, returns should reflect changes in the net asset value (NAV) after the expenses have been factored in, exclusive of any brokerage or other fees you may have paid and any taxes you may incur. Expenses related to the underlying holdings of a target-date fund may depend on the target fund itself. I would suggest reading the prospectus to see if there’s any waiver of fees from the underlying funds. If they are not waived, the drag from those expenses should be reflected in the NAV returns.

Tax Guide Correction: RMD Start Age

In the Required Minimum Distributions (RMDs) section (page 13 of the December 2020 AAII Journal), the first sentence should read:

The SECURE Act raised the age for taking mandatory distributions from retirement accounts. If you reach age 70½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72. (The former starting age of 70½ applies to those who reached 70½ on or prior to December 31, 2019.)