Asset Allocation in Retirement

Comment posted to “Reduce Stock Exposure in Retirement, or Gradually Increase It?,” by Michael Kitces and Wade Pfau, in the April 2014 AAII Journal.

The analysis makes sense on paper, but there is one factor not mentioned at all in this article. Assuming the 20-to 30-year retirement mentioned, the retiree would be 85 to 95 years old. The amount of analysis and management of the stock portfolio suggested would be beyond the mental capability of most retirees of that age. Having lived in a retirement (ages 55 and older) community for over 18 years, I see that decline on a daily basis. In addition, passing on a stock portfolio of that magnitude to the widow could be problematic.

— G. Flowers from Arizona

I like the article, but think the pre-retirement speculation (U-shaped curve) is wrong. I suspect the trend just before retirement should be similar to the trend just after: Set the near-term buckets aside and leave the equity buckets to earn more over time. If the pre-retirement market is down, there’s more time to recover; if it’s up, you’re ahead of the game.

— John Eterno from Texas

Retirement Spending Alternative

Comment posted to “A More Dynamic Approach to Retirement Spending,” by Colleen M. Jaconetti, Francis M. Kinniry Jr. and Michael DiJoseph, in the April 2014 AAII Journal.

Yet another article positing that you will run out of money or will not run out of money before you die. All have the same basic assumption, a 4% withdrawal rate, and then go on to say why the particular tweak used by this investment adviser will be the cure-all. All of this is complete nonsense and unusable in the real world.

Assume that you have a known time horizon until fully retired. How much money will you need to have invested today in a given investment strategy to maintain your current living standard, inflation-adjusted, including medical costs, adjusted by a different inflation standard, such that you will run out of money at age X? I will bet that not one commentator, financial adviser or expert can answer this question, even though it is precisely what everyone wants to know.

—Nathan A. Busch from Minnesota

Systematic Models for Decision-Making

Comment posted to “The Case for Systematic Decision-Making,” by Wesley R. Gray, Ph.D., in the April 2014 AAII Journal.

Thank you for a very interesting article. However, I have two concerns with its conclusions:

1. Assuming the model is made by humans rather than an intelligent computer that can analyze data according to its own methods, why doesn’t System 1 thinking affect the making of the model?

2. More significantly, doesn’t the use of the model assume that the environment it is working in is constant? If some future humans no longer have an appendix but still suffer abdominal pain for other reasons, wouldn’t the model still predict appendicitis?

— Bert Krauss from Connecticut

Notes on Model Shadow Stock Portfolio

Comment posted to “Model Shadow Stock Portfolio Rules Amended and Clarified,” by James B. Cloonan, in the April 2014 AAII Journal.

What secondary screenings do you use when there are more opportunities than funds available? Or rather, how do you selectively rank stocks that pass the Shadow Stock Screen?

— Brad Schulz from Michigan

Jim Cloonan responds:

I use the lowest price-to-book-value ratio, but if the ratio is within 0.15 (i.e., 0.60 vs. 0.46), I consider them equal and use the smallest bid/ask spread percentage.

I have not been able to sell Fab Universal (FU) since your “emergency sell” recommendation. How about some updates on what’s going on with the stock?

— William Yon from Alabama

Charles Rotblut responds:

On April 7, 2014, FAB Universal issued a press release saying it had until April 17, 2014, to file a plan of compliance with the New York Stock Exchange. If the plan as submitted is not accepted, the company’s stock will be subject to delisting proceedings.

As of press time, we had no additional information regarding the stock.