Model Shadow Stock Portfolio Rules

Comments posted to “Three Different Ways to Follow the Model Shadow Stock Portfolio,” by James B. Cloonan, in the July 2013 AAII Journal:

There should be more details on entry points for new members who are starting to build their portfolio. Since the changes are made quarterly, any entry and exit prices would be useful.

—Priya Balakrishnan from Texas

Charles Rotblut responds:

The buy and sell rules for the portfolio focus on valuation, market capitalization size and profitability, not price action. If a stock’s price rises from the purchase price, but the stock otherwise meets the buy criteria for the portfolio (including the buy and sell rules), it is considered to be “qualified” for purchase.

This said, we do maintain a detailed list of the portfolio’s transactions for those members who are interested in seeing them. Select Transaction History on the right side of the Model Shadow Stock Portfolio page at www.aaii.com/model-portfolios/portfolio and look for the link to the detailed version.

Why the rule: “No financial stocks or limited partnerships will be purchased”?

—Jim Peabody from Vermont

James Cloonan responds:

There is nothing wrong with financial stocks or partnerships. The problem is that the process used for selecting stocks in the portfolio doesn’t work for financial stocks or partnerships because their balance sheets are different. This is true of most value-oriented portfolios. They ignore financial stocks and partnerships. We have not found a time-proven method for choosing the best financial stocks.

There is no question that it will be hard to replicate the published performance of the Model Shadow Stock Portfolio exactly due to “pop” that new additions receive as followers of the strategy take positions. However, if you believe that the research points to a longer fundamental uptrend for the Model Shadow Stock Portfolio holdings, you should still do well. Even though AAII members undoubtedly drive up these stocks short term, I have to believe that we have relatively little long-term impact on the valuation of these companies; that comes from long-term positive performance of the companies’ businesses and the accumulation of the stock by other investors over time.

—James Mcgehee from North Carolina

Yield vs. Current Yield

Comment posted to “Protect Your Capital: Never Chase High Yield,” by Donald Cassidy, in the July 2013 AAII Journal:

I truly applaud you for the reasoned research that went into this article. I have copied it out to my collection of materials on income investing in general.

One thought: If you take the word “current” out of “current yield,” then a certain type of dividend growth investing (with a concentration on the growth part) would result in a higher income each year one held the asset. Thus, the income goes up, and really, most income-oriented investors would be OK with this. The catch is that they have to start with 3% yields, and work higher over time. If someone has the time, then this is a way to reach for yield, but not “current” yield.

—Robert Albers from Illinois

Recalculate During Retirement

Comments posted to “Safe Withdrawal Rates and Certainty-Equivalent Spending,” by Druce Vertes, in the July 2013 AAII Journal:

A big shortfall of this and many more articles is the lack of an example from which the reader can calibrate what they think the author is trying to say.

Every constant $$$ payout, be it Social Security, fixed pensions or constant withdrawal amounts, has a Taleb function (a Black Swan) that can make it blow up. From my nearly 20 years of retirement, with all the blowups in the market one needs to assume that every few years they are re-retiring and should recalculate their actual money situation. This more intelligently keeps their spending under control than using a cost-of-living number.

—Hal Marrett from New York