Test Your Retirement Scenarios

Comment posted to “Allocate by Market Weight (And Adjust for Personal Circumstances),” an interview with William Sharpe, in the September 2014 AAII Journal.

I found this to be one of the best articles I have read in the AAII Journal in the last few years. I have studied Professor Sharpe’s book “Investors and Markets.” It is a very technical read, but the blog you referenced in the article incorporates his ideas from this book into a very powerful online tool for scenario testing of retirement portfolios. It is based on the theory of equilibrium between buyers and sellers of equities and is very state-of-the-art in current economic circles. Professor Sharpe incorporates this powerful concept of portfolio theory into his blog and software program without expensive fees from a software vendor, so I was very pleased to see this referenced. There is also a free online calculator to determine the adaptive asset allocation policy value available at www.ftse.com/Analytics/AAAP/Home/Calculator.

Well done, and I hope to see more articles of this caliber.
—Michael Muhle from Texas

Fundamental Weighting Increases Returns

Comment posted to “Weight by Fundamentals, Not by Price,” an interview with Robert Arnott, in the October 2014 AAII Journal.

I don’t understand the Excess Return Chart. S&P 500 Equal Weighting is supposed to have resulted in 2.42% excess return. Is this 2.42% over the period 1967 to 2011? I assume it is not. I assume this must be on a per-annum basis. If it is on an annual basis, does that mean that if I would have normally gotten a 7% return using the S&P 500, I would have gotten a 9.42% return with the S&P 500 Equal Weighting?
—Glen Andersen from Nebraska

Charles Rotblut responds:
Research Affliates says on their website that fundamental weighting “eliminates a return drag of about 2% a year in developed markets and more in less-efficient markets.”

Beware Unintended Issues With Stop Orders

Comment posted to “The Many Ways to Place a Buy or Sell Order,” by Jaclyn McClellan, in the October 2014 AAII Journal.

The description of stop orders in this article is typical in that it states that the order is filled once the stop price has been reached. In practice, brokers execute stop orders based on bids and asks and they don’t seem too anxious to disclose this unless you dig deep into the fine print. What this means is that your stop order can be executed at a disadvantageous price to you and (in the case of thinly traded securities) the price may never even hit your stop, yet you are stopped out (in the case of a protective stop). I learned this the hard way. As a result, what I do now is to place a market order (you could use a limit also) contingent on the last trade reaching my desired stop price. This effectively duplicates a stop order but is only executed if the security actually trades at the desired price. It also has the added advantage that it keeps my order out of the market until the stop is actually hit.
—Jesse Seegmiller from Virginia