It started with a conversation. I don’t remember the specifics, but the conversation led to seeing if we could get Ed Altman to discuss his Z-Score model. A few emails were exchanged and before long I was on the phone with Altman. The resulting discussion starts here.

For those unfamiliar with the Z-Score, it is used to gauge the probability of a company going bankrupt or incurring significant financial distress. AAII’s Stock Investor Pro fundamental stock screening and research database calculates the original Z-Score model, which was designed for manufacturing firms. (Click on the “Ratios” tab in the program and scroll to the bottom of the window. You’ll see the Z-Score.) Instructions for creating custom fields to calculate the newer Z double prime score, which is applicable to companies in a variety of companies and sectors, are included as an addendum to my interview with Altman on AAII.com.

Bankruptcy is a big risk faced by those of us who invest in individual securities. Though not nearly as frequent as downward price moves, bankruptcy will make a stock worthless and cause bondholders to either not be paid back or be only partially paid back. The mere threat of financial distress can send prices plunging.

There are, of course, other risks facing investors. Karen Firestone, whose resume includes working with Peter Lynch at Fidelity, shares her four tenets of sensible risk here. Among them is relying on knowledge, skills and experience. Having the discipline to check what someone tells you can save you a lot of money. Studies have shown that we humans will believe someone who expresses an opinion with considerable conviction even when we know they are wrong. The best way to avoid falling for this behavioral mistake is to postpone making a decision, ask questions and do additional research. When in doubt, don’t act. When pressured to make a financial decision, grip your wallet tightly and walk away.

Going against a well-argued or a confidently given opinion can be difficult when it’s about an investment with seemingly great prospects. The temptation to get in on the next big thing is very big, but it’s also very costly. While there certainly is not reward without risk, reward most often comes to those who take well-thought-out calculated risks as opposed to blindly hoping to hit it big. Spencer Jakab of The Wall Street Journal describes the latter—chasing after the next big thing—as one of the common mistakes ineffective investors make here.

In this month’s issue, there are two articles you may want to save.

The first is the Internal Revenue’s Rollover Chart. It shows what types of retirement savings accounts can be rolled over into another type of savings account. We’ve spruced up the chart a bit to make it easier to use. Pay close attention to it, since making the wrong decision can both be costly and cause headaches.

The second is about widowhood. Karen Altfest wrote an update to her popular 2009 AAII Journal article, “Surviving a Loss: Smart Steps for Coping With Widowhood.” The new article is filled with practical and actionable advice about what to do. It also gives good guidance about what needs to be addressed immediately and about which decisions and actions should be postponed. Though written for widows, the advice applies to widowers as well.

Finally, a few members expressed disagreement about a Briefly Noted article published in last month’s issue, “Work Longer to Live Longer.” Studies suggest that postponing retirement increases life spans. What the research has yet to show is whether working part-time or volunteering counts. My presumption is that these activities will. From what I’ve read so far, anything that gives you structure, engages your cognitive abilities, allows you to interact with others and gets you moving helps. So, even if it’s not the same career you’ve worked in, be active. Doing so can increase your life span, your quality of life and, depending on the activity, your wealth.

Wishing you prosperity, 

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII