Boomer-Candy Craze

Comments on “The Truth About High-Yield Mutual Funds and ETFs,” by Cynthia McLaughlin, in the September 2024 AAII Journal:

A large percentage of retirees are fearful of eroding their nest egg (principal) and only want to spend income. At the same time, they desire as much income as possible to fund their spending, so they look for ways to restructure their portfolios to maximize dividends and interest. Mutual funds and other financial products that can return capital and make it appear to be “income” are very tempting, as they appear to solve the problem of preserving principal while increasing income. This isn’t boomer candy; every generational group will suffer from this problem when they retire.
—John L. from New Jersey

What about exchange-traded fund (ETF) boomer candy based on 20-year bonds yielding 15.3%? For example, the iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) is described on AAII.com as “a passively managed taxable bond long government ETF. The investment seeks to track the investment results of the CBOE TLT 2% OTM BuyWrite index, which reflects a strategy of holding the iShares 20+ Year Treasury Bond ETF while writing (selling) one-month call options to generate income. The fund will seek to write call options up to (but not exceeding) the full amount of shares of the underlying fund held in the fund (i.e., the short position in the call option is offset, or ‘covered,’ by the long position the fund holds in shares of the underlying fund).”
—Nick D. from New York

Learning From Mistakes

Comments on “Six Lessons of Investment Loss to Keep You Winning,” by Andrew Stotz, in the September 2024 AAII Journal:

I have done okay in stocks (using AAII Shadow Stock concepts), but I’ve made mistakes. Not enough to hurt me much but enough to modify my approach. The two biggest changes I’ve inserted into my process are: 1) When I read the overview of the stock on its AAII Stock Evaluator page, if I can’t describe what it does or to whom it markets, I simply don’t buy the stock; 2) I won’t buy any stock that doesn’t have a full seven years of financial results posted (I’m an AAII Platinum subscriber). Then I proceed to do my best amateur job of determining a fair market approximation of the stock based on free cash flow. If I can buy the stock at a discount to that fair market estimate, I can put money in and not worry much if a bear market hurts my holding. In fact, that can often be a reason for buying more. I keep about 13 stocks in my portfolio, and the capital appreciation—i.e., Shadow Stock—purchases represent about 20% of my total portfolio. In that way, I get the fun of messing with stocks without being buried by my own mistakes.
—James E. from Florida

An excellent article from Stotz. I agree that greed (as well as all the rest of human nature) lurks as the dark star over everything we undertake.
—John D. from Louisiana

Far and away my biggest mistake was the opposite of those in the article. When I joined an internet company at the start of the boom, I was awarded a pile of stock options. I did the reasonable thing and did an exercise and sale as each tranche matured. I didn’t need or spend the money; it’s just that these internet companies are risky. The company was a going concern, but some 10 years later it took off a second time. If I had kept, say, half of my shares instead of selling, it would be worth a ridiculous amount of money. I’ve made the gamut of standard investing mistakes, but none compare to being reasonable.
—Charles B. from Washington

Low-Expense Fund Families

Comment on “Using Vanguard Funds and ETFs for Your Asset Allocation Needs,” by Cynthia McLaughlin, in the September 2024 AAII Journal:

Vanguard, Charles Schwab and Fidelity funds generally have the lowest expense ratios, and they all offer excellent products. (I own ETFs from all three.) The only downside is that they get to vote your shares in the corporations held within the funds. If you can get past that, their low-expense-ratio domestic equity index ETFs can provide a comfortable retirement for anyone who starts early and regularly invests 15% or more of their paycheck into them.
—Robert A. from North Carolina

Testing Buffett’s Theory

Comment on “Backtests Reveal Strength of Buffett Indicator as a Long-Term Market Predictor,” by Tudor Pop, in the September 2024 AAII Journal:

There’s an excellent discussion and critique of the ratio of the market value of equity scaled by gross domestic product (MVE/GDP) at www.currentmarketvaluation.com. The predictive value of the indicator is discussed in several articles found throughout the internet—Nasdaq is one particular site.
—Fernando R. from Florida