The Why of Model Fund Portfolio Decisions

Comments posted to “Model Fund Portfolio: Adjust Risk Based on Personal Factors,” by James B. Cloonan, in the August 2014 AAII Journal.
In the Model Fund Portfolio, why not a lower-cost ETF by Vanguard instead of Guggenheim?
—George Schmidt from New York

James Cloonan responds:
The only reason is that I prefer to see five years of history. I will probably switch next year if all stays the same.

I am curious as to why this strategy favors mutual funds in the large- and mid-cap space and ETFs in the small-cap space. My thought has always been that mutual fund houses can add the most value in the small and foreign spaces. I think (but don’t know) that the standard deviation analysis of the variation in performance would support my theory. Granted, after 2008 I am drawn to ETFs for their favorable tax consequences, but I still believe in the value of first-hand research in small and foreign spaces.
—Conrad Szymanski from Florida

James Cloonan responds:
The mutual funds were chosen for the Model Fund Portfolio for their qualities as described in the Selection Rationale, and they just happened to be large-cap funds. I agree that fund managers should be able to add value among smaller-cap stocks, but there is no small-cap fund that is currently available that I feel is a better candidate for the portfolio than the ETF.

Who Pays the Debts of the Deceased?

Comment posted to “Estates, Not Heirs, Generally Pay the Debts of the Deceased,” by AAII Staff, in the Briefly Noted column in the August 2014 AAII Journal.
I’m an attorney and practice both elder law and estate law. “Filial responsibility” has been a hot issue in Pennsylvania in the past few years, after a nursing home successfully sued the adult son for his mother’s unpaid nursing home bill. These suits are, fortunately, rare, but the precedent is enough to make people plenty nervous. Imagine not only having to support your own family (spouse, kids, etc.), but also being slammed with a huge bill for Mom or Dad’s stay at Happy Acres. At these times, it’s critical to seek experienced legal counsel as soon as (or before) a claim is made.
—Barry from Pennsylvania

Counterpoints to Jeremy Siegel Interview

Comments posted to “Real Returns Favor Holding Stocks,” an interview with Jeremy Siegel, in the August 2014 AAII Journal.
Professor Siegel commented in the August AAII Journal that “Over the long run, you don’t get as high of a return [with market timing] as buy-and-hold investors get.” Mebane Faber has told AAII audiences that market timing increases returns.

Siegel uses a simple moving average (SMA) over 200 market days while Faber uses a SMA over 10 calendar months. Siegel calculates his signals from the Dow Jones industrial average while Faber calculates his signals from the S&P Composite total return index. Faber trades monthly while Siegel trades as often as daily. Siegel would have found that market timing provides a higher return than buy and hold if he had traded monthly or if he had based his signals on a more effective index.

The lesson for investors is that some timing strategies are more effective than others.
—Peter James Lingane, CFP, from California

I understand your argument favoring stocks over bonds for the long haul, and would agree. However, those of us over age 75 must guard against a severe drop in the market when a downdraft can erase 25% to 50% of our assets and we may not have the time to recover. Recognizing that not all bonds are the same, there is a class of bonds known as convertible bonds whose values have an “equity kicker,” which may be a suitable alternative. However, trading in these bonds is not an amateur’s game and professional advice is essential. Lumping all bonds into a single category does a disservice to your readers.
—John Croy from Rhode Island