Take Caution With Leveraged & Inverse Funds

Comment on “Tracking the S&P 500 With Mutual Funds and ETFs,” by Charles Rotblut, CFA, in the March 2017 AAII Journal.

I’m confused on the investing results on the leveraged and inverse funds. When examining the long-term charts, they show good results based on price. Can you explain the danger of investing in these funds when long-term charts show good performance?
—Gus Adams from Alaska

Charles Rotblut responds:
Most leveraged and inverse funds are designed to be held for just one day. Beyond this period, their returns can stray from expectations. More importantly, the use of leverage magnifies any moves. For instance, a fund designed to realize twice the daily return of the S&P 500 will lose twice as much when the large-cap index falls.

Rebalancing Portfolio Allocations

Comment on “Rebalancing Update: How Frequently Allocations Should Be Adjusted,” by Charles Rotblut, CFA, in the March 2017 AAII Journal.

The scenario that did not have rebalancing had a higher average daily weighting in stocks than bonds. I would be interested in seeing the results of a scenario where the average daily weighting in the rebalanced portfolio was the same as the non-rebalanced portfolio throughout the scenario.

This could be accomplished by creating a scenario where the beginning weighting in stocks was higher in the rebalanced portfolio than in the non-rebalanced portfolio, causing the average daily balance to match the non-rebalanced portfolio. I believe that as long as the average daily allocations are the same, the returns will be very similar regardless of frequency of rebalancing.
—Thomas Donohue from Virginia

Charles Rotblut responds:
The point of rebalancing is to maintain a desired allocation. If the desire is to have a portfolio with a 90% allocation to stocks, then the allocation should start with that equity exposure. If rebalancing is not periodically done, the allocation will drift, over time, to the asset class with the best long-term performance.

The spreadsheets linked in the online version of the article contain both the annual returns used and detailed instructions if you want to test out different allocations.

ETFs in Model Fund Portfolio

Comment on “A More Aggressive Approach for the Model Fund Portfolio,” by James B. Cloonan, in the March 2017 AAII Journal.

Do you have model ETF portfolios?
—Paul Murphy from Connecticut

Charles Rotblut responds:
The Level3 Passive Portfolio shown in Table 4 of this article is composed solely of exchange-traded funds (ETFs). The former Model ETF Portfolio that James Cloonan tracked through his column was folded into the Model Fund Portfolio. See the Model Portfolios area of AAII.com to keep current on the mutual funds and ETFs in the Model Fund Portfolio.

More Details Needed on Inherited IRAs

Comments on “Options for Handling Inherited IRAs,” in the Briefly Noted column in the March 2017 AAII Journal.

Not detailed enough.
—W. Campbell from Colorado

I agree with the previous comment by W. Campbell about this article not being detailed enough to be very useful. However, if you look at the source cited at the very last line of the article, you will find it has a URL that links to an article entitled “Inherited IRAs—What You Need to Know” that has all the detail anyone other than a lawyer would want.
—Michael Ellis from Illinois

Charles Rotblut responds:
Thanks for your feedback. I realize inherited IRAs come with their own rules and stipulations. A future AAII Journal article will address them in further detail.