• Editor's Note
  • Editor’s Note

    by Charles Rotblut, CFA

    Editor’s Note Splash image

    One of the most common inquiries I hear from AAII members is where to find yield. The current environment has created a large, unquenched thirst for yield. Even with the increase in bond yields that started in late May, yields on the benchmark 10-year Treasury note were only at 2.31% at press time.

    The Federal Reserve’s ongoing quest to stimulate economic growth has left it as the enemy of savers. Other central banks and governments are also focused on stimulating their economies. European Central Bank President Mario Draghi stated his willingness to use “non-standard measures” to spur growth during a speech last month in Jerusalem. Japan’s market surged upward earlier this year in response to Prime Minister Shinzo Abe’s growth strategy.

    The combination of these actions has created a “risk on” investing environment. Such environments lull investors into ignoring real, but not always immediate, risks. In the case of portfolio income, some investors are so focused on absolute yields, they are not asking why those yields are high relative to most other securities. The danger of not questioning why other investors are asking for a high relative yield on a stock, partnership unit or bond is significant, since high relative yields signal that compensation for higher perceived risk is being demanded.

    To convey the dangers of reaching for high yield, I asked Don Cassidy to write an update to his May 1999 AAII Journal article, “Equity-Income Investing: Beware of Yield Overreaching.” Don, who formerly worked for Lipper and is the program chair for the Denver AAII local chapter, responded with an article that covers a variety of high-yielding securities, including stocks, master limited partnerships and junk bonds. His article starts here.

    Another common question I receive is how to follow the Model Shadow Stock Portfolio. The key to following any model portfolio—whether it is one of ours or another organization’s—is to buy when a stock is added and sell when a stock is deleted. Doing so will help you approximate the reported returns.

    However, since one of the goals of the Model Shadow Stock Portfolio is to limit transactions, waiting on new additions can result in a lengthy process to build your own portfolio. This is why AAII founder and Chairman James Cloonan suggests buying both the new additions and any current portfolio holdings listed as qualifying. There are also two other alternative ways to follow the portfolio, as Jim explains here.

    For those of you who prefer to pick your own stocks, there are four articles you will want to read. John Heins and Whitney Tilson, authors of “The Art of Value Investing,” share insights from several of the world’s top value investors here. Barron’s columnist Michael Kahn discusses using charts to determine when to sell here. AAII Chicago local chapter board member Kevin Truitt strikes a middle ground and explains how value and momentum can be combined to create a winning strategy here. AAII President John Bajkowski turns Kevin’s article into a stock screen for his latest First Cut column, which appears here.

    Stocks aren’t the only focus of this issue. I’ve also included a new article on retirement withdrawal rates. Druce Vertes, who was referred to me by the CFA Institute, recently published a new working paper looking at withdrawal rates from the standpoint of safely maximizing lifetime spending. He concluded that the initial withdrawal rate can be increased if a retiree is willing to accept some volatility in his portfolio. Vertes’ article appears here.

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    Finally, I want to encourage you to come to our investor conference this November in Orlando, Florida. We have two great keynote speakers, Robert Shiller and James O’Shaughnessy, plus more than 25 other presenters, including Michael Kahn. Details about the conference can be found here.

    Wishing you prosperity,
    Charles Rotblut, CFA
    Editor, AAII Journal

    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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