Diversifying for Risk

Comment on “How to Outsmart Your Investing Decisions,” by Anine Sus, in the May 2024 AAII Journal:

I was reviewing my portfolio weekly and making changes quarterly, including rebalancing if needed. The result was too much information to process that was not actionable. I am now trying monthly reviews, making changes if needed. I am also keeping a list of new investment ideas that I track performance for.

I am trying to rationalize my approach by synchronizing information acquisition with my trading cycle. I need to support an action cycle and not simply do nothing. In this way, I can separate decent market signals from the noise. I also qualify new investment ideas, excluding those that carry excessive risk, because I have to be able to live with the results of any changes over a monthly cycle.

I keep a portion of my portfolio in lower-risk fixed-income investments, following AAII founder James Cloonan’s advice to always hold something that can be sold in a down market.

The most important objective is avoiding the full extent of market losses. That is the payoff for risk diversification.
—John J.M. from Washington

QCDs and Taxes

Comment on “For Qualified Charitable Distributions, Timing Is Everything,” by Brian Dobbis, QKA, QPA, QPFC, TGPC, in the May 2024 AAII Journal:

If you live in a state that imposes an income tax, check whether and how it recognizes qualified charitable distributions (QCDs). They may be considered taxable income.

Consider New Jersey: An individual retirement account (IRA) consists of original contributions, possibly rollovers from 401(k) plans and investment growth. The state already taxes the original IRA contributions when they are made, so they are not taxed again. Rollovers and growth are considered taxable income. That likely means almost all of the QCD amount will be taxable income.

This does not change the many benefits described in the article, but it is a consideration in at least some states. Estimated state tax payments may be needed to avoid an underpayment penalty due to the QCD.
—Peter B. from New Jersey

Finding Your Investing Style

Comment on “Winning the Battle Against Investment Fees and Biases,” by Paul Merriman, in the May 2024 AAII Journal:

I have read this before, but it is a good reminder to hear it again for the importance of seemingly minor points that impact your portfolio and life in such a big way.

I learned some years ago to stay away from individual stocks and margin accounts. It is a fool’s game that I like to leave up to the professionals who are running the exchange-traded funds (ETFs). One piece of bad information, and all the work you put into research is lost. I use sector funds as they come in vogue and mostly use low-cost index funds. The only stock I’ve owned for many years is Berkshire Hathaway Inc. (BRK.B), as it behaves like a mutual fund.
—Joseph C. from South Carolina

Financial Statement Woes

Comment on “Getting to the Bottom Line: How to Read the Income Statement,” by Jack Gilleland, in the May 2024 AAII Journal:

Thank you for another excellent overview! Unfortunately, no one has ever devised a greater construct to obscure the financial health of a company than accrual accounting. I get headaches from trying to convert income statements to cash-basis profit and loss statements, but I try anyway.

The cash flow statement is a significant improvement over the income statement, but there’s still too much wiggle room. I would like to see a plain old cash-basis profit and loss statement with footnotes describing all the concepts that are currently presented on an accrual income statement instead of the other way around. The “doctored” accrual statements never disclose enough in their footnotes to be able to convert them to a simple profit and loss statement.
—Robert A. from North Carolina

Downside to Diversification

Comment on “Tech-Related Stocks and Interest Rates Drive Allocation Model Returns,” by Charles Rotblut, CFA, in Dispatches in the May 2024 AAII Journal:

One of the downsides of diversification is you always have exposure to an asset class that is performing poorly. And the underperformance of some of these asset classes like international or small stocks can last longer than anyone is happy to wait. I strongly believe in wide diversification in equities, but it ain’t all roses.
—John L. from New Jersey