The Flaw With Inflation Indicators

Comment on “How Does the CPI Compare to the PCE Price Index as a Measure of Inflation?,” by Tudor Pop, in the November 2024 AAII Journal:

I enjoyed this comparison of two different inflation indicators. In my view, both are fatally flawed since their core versions ignore food and energy. These are two of the most vital necessities of life. Of course they are volatile since both are global markets.

The stock market is volatile too, but we don’t ignore it; we use moving averages to even out the variations. I would advocate for adding food and energy back into the core consumer price index (CPI) using 12-month moving averages, for example. This would, over time, capture the longer-term variations. My experience over the last 27 years of retirement is that my personal inflation rate has been more like 6% to 7%, and I believe ignoring these variables is at least partly the reason.
—Barry M. from Idaho

Expanding the Use of AAII’s Grades

Comment on “Choosing the Right Mutual Fund or ETF for You,” by Charles Rotblut, in the February 2025 AAII Journal:

I like viewing stock grades through AAII’s A+ Investor. However, I feel that the grading of exchange-traded funds (ETFs) and mutual funds based on their net asset value (NAV) price compared to others of their kind is lacking. It does not seem too difficult to just use the asset weightings of the stocks in the fund along with the stock grades from your stock screener to create something more meaningful. I can easily sort my ETFs in a Morningstar portfolio by compound annual growth rate (CAGR) and find the better ETFs of any group, but it tells me nothing about the value, momentum, growth and quality of the stocks in the ETF.
—Dave G. from Texas

Charles Rotblut responds:

Dave G., the data we receive from Morningstar does not include the specific securities held in each fund. However, A+ Investor and AAII Platinum subscribers can add the fund’s top holdings into My Portfolio to see their A+ grades on the five factors.

Possible Causes of Lower Returns Among Older Investors

Comments on “Cognitive Decline Worsens Investors’ Returns,” by Omar Beirat, in the January 2025 AAII Journal:

I believe the authors of the study have reached an erroneous conclusion about senior investors. They have not considered that, as investors age, their goals and investing strategy change, resulting in lower returns. Many purposely change their allocation to more fixed-income and cash investments while reducing investments in equities. I believe that is the most prominent reason for declining returns as investors age, not cognitive decline.

I have followed the modern portfolio theory in my 60+ years of investing. I have generally followed an asset allocation of 110 minus my current age to determine the percentage of my portfolio to invest in equities. I am now in my late 80s and have reduced my equity allocation to about 30%. This obviously reduces my overall returns versus a more aggressive portfolio of say 60% equities at age 50. It is logical to reduce equity holdings as one ages because 1) wealth has been built to an acceptable level and 2) there are not enough remaining years to recover from a severe market loss.
—Thomas S. from Minnesota

Another factor that wasn’t mentioned in the study is that younger investors are more aware of new investment trends. They are quicker to recognize and adopt these new trends. If one’s returns are sufficient to meet or even exceed one’s needs, why would one be concerned that there are others who are younger doing better?
—R.W. from Pennsylvania

As the paper points out, there is an uptick in performance among people above the age of 64, which may mean that retirees have more time to focus on the stock market and where they put their money than those in their 50s. Younger people may take more risks and get higher returns. So I’m not sure that cognitive decline is necessarily the main driver of performance compared to other factors like available time spent on investing and risk-taking by age group.
—Benjamin L. from New Jersey

From ages 47 to 76, the mean excess return drops 1%. And the study’s recommendation is for older investors to hire a professional investor whose advice will probably cost 1%. I am impressed that the mean excess return is positive for all age groups. Just like in Lake Wobegon, everyone is above average!
—John L. from New Jersey