Using the Level3 Passive Portfolio

Comments on “Level3 Passive Portfolio Transitions to Asset Allocation Models,” by John Bajkowski and Charles Rotblut, CFA, in the August 2022 AAII Journal:

This is quite a shift, and there is no specific guidance given for those who have been following the Level3 Passive Portfolio. What do you recommend?
—Mary E. S. from Ohio

I moved to the Level3 Passive Portfolio after a period of active trading that left me not very far ahead. My gains were less than the market average, but I expected that. My losses were also less than the market average. So far, Level3 has done what I wanted with less effort than scouting the market for potential gainers. I have no doubt that some incremental approach, such as the allocation method described, could outperform the Level3 approach. But to implement that, I would need more information. All I need for Level3 is the assurance that the ETFs I already hold are not experiencing any unusual events that threaten their recent usefulness.
—John J. M. from Washington

Consider how AAII is adding value for members. I don’t think that tracking model portfolios grounded in market-capitalization-weighted index funds adds value. If AAII continues to believe that individual investors have an advantage to do things that institutional investors cannot, then the AAII feature portfolio (for equities anyway) should reflect that philosophy, however imperfectly.
—Sean O. from Texas

Regarding the fact that the Level3 Passive Portfolio has underperformed the S&P 500 index over the past six years, at this point I’m not going to abandon the rationale for the Level3 approach. In his book, James Cloonan provided stock performance trends over a much longer time horizon as the basis for the approach. I’m going to stick with it.
—Thomas S. from Oregon

AAII editors respond:
Those of you who have been using the Level3 Passive Portfolio and are happy with it should continue to do so. As we note in the article, the portfolio doesn’t match the needs of every investor. Hence, the shift in focus. The AAII Asset Allocation Models provide a framework that a wide variety of investors can use to build personalized portfolios. We will provide suggestions for how to do so in future articles.

Where to Buy Bonds

Comment on “Should You Buy Bonds When Interest Rates Are Rising?,” by Hildy and Stan Richelson, in the August 2022 AAII Journal:

Excellent article! Especially important is the statement that bond funds are not bonds, and that buying bond funds is speculating that interest rates will fall. Too many people view the relationship between bonds and bond funds as similar to stocks and stock funds. They are completely different animals.
—Thomas S. from Minnesota

Bonds lose value when interest rates rise. The longer the duration, the more a bond’s market value drops. So if you know that interest rates will continue to rise, it would not be a good idea to purchase bonds. Bond ladders keep the market losses unrealized (value not marked to market), but the losses are still real.
—John L. from New Jersey

I agree with John L. Losses are real if you need to sell bonds before maturity, which is always a possibility. To assume that an investor would always be holding bonds until maturity is unrealistic. Many times, investors’ needs change over time—thus, being “locked in” to bonds is risky.
—Richard H. from Pennsylvania

Excellent article on bond investing in general and the current market specifically. One thing was missing though: How do I buy specific bonds?
—Habib R. from Virginia

Habib, you can buy Treasury bills, bonds and notes from www.TreasuryDirect.gov. Four-week to 52-week T-bills are yielding around 2.5% to 3.0%—better than the bank. You can also buy the I bonds mentioned from TreasuryDirect. You can buy bonds from your broker, but they are from the secondary market. For muni bonds, you should check with your state to see if it sells directly to its residents. Otherwise, you can buy them from your broker.
—Richard C. from California

Defining Risk

Comments on “Using Your Portfolio’s Asset Mix to Control Your Risk,” by Wayne Thorp, CFA, in the August 2022 AAII Journal:

The article clearly links risk with volatility, but volatility and risk are two different animals. Personally, I don’t have a high risk tolerance, yet my invested assets are 100% in equities. What I have is high volatility tolerance. I am convinced that it is far riskier to try to avoid volatility by accepting the paltry long-term returns from bonds (especially considering the punishing tax implications of earning interest instead of qualified dividends and long-term capital gains) than it is to simply ride the ups and downs of the market with long-term investments in a reasonably diversified portfolio of equities.
—Robert A. from North Carolina