IRA Beneficiary Rules

Comment on “Inherited IRA Rules for Spouses, Heirs and Trusts,” by Charles Rotblut, CFA, in the July 2017 AAII Journal:

This generally helpful article does not address the case where an IRA is inherited from a spouse who had not reached the age of 70. For that case, it is important for the surviving spouse to know that if she/he is “...the sole designated beneficiary ...distributions to the spouse do not need to begin until the year in which the owner would have reached age 70.” (See IRS Publication 590-B, p. 9.)

So, for example, if the owner’s death occurs at age 60, the surviving spouse has 10 years before she/he needs to worry about RMDs from the account.
—David Schwarz from Washington, DC

ETF Returns: Comparing to the Category

Comment on “The Individual Investor’s Guide to Exchange-Traded Funds 2017” in the August 2017 AAII Journal:

The 2017 spreadsheet layout is much better than the 2016 one. There is one confusing issue: What does “DFC” stand for? It appears in over 20 column headings.
—Jared Bessert from Wisconsin

Jean Henrich responds:
DFC stands for “difference from category.” It shows how much the ETF’s return differs from the average return for the category that the ETF resides in. In the online tables, this is shown as “Cat +/-”.

Answering Unknown Questions

Comment on “The Four Groups of ETFs,” by Elisabeth Kashner, from the August 2017 AAII Journal:

I learned something new in each paragraph. It’s the questions we don’t even know to ask that blindside us.

AAII is a remarkable resource.
—Bill Lawlor from Pennsylvania

Substituting Free-Cash-Flow Yield forDividend Yield

Comment on “Three Value-Investing Benchmarks,” by Gary Smith, in the July 2017 AAII Journal:

The July article “Three Value-Investing Benchmarks” was excellent. Not only did it provide three methods to determine if the stock market is under- or overvalued, all three methods actually agree with each other. I was particularly impressed with the CAEP model, which is based on Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE). Many pundits assert that the CAPE is currently very high and therefore the stock market is very expensive. In contrast, the CAEP method shows that the stock market is reasonably priced.

However, I do have a critique of the John Burr Williams dividend discount model and John Bogle’s 10-Year Horizon model. Both rely on dividend yield, which is fine for valuing the stock market as a whole, but not for valuing individual stocks. The reason is that different companies have different dividend payout ratios, and some pay no dividends at all.

Therefore, I believe that the free-cash-flow yield (free cash flow generated per share divided by the price per share) should be used in place of the dividend yield. After all, if a person wants to buy a business, he would determine a fair price for the business based on the cash profits it generates, not on the distributions he would withdraw as dividends.
—Stephen Moss from Brooklyn, New York

Model ETF Portfolio Changes

Comment on “Model Fund Portfolio: Two ETFs Replaced With Lower-Cost Equivalents,” by James B. Cloonan, in the August 2017 AAII Journal:

Thanks for the update. I have been very impressed [with Cloonan’s] “Investing at Level3” book. I have long found equating risk with volatility to be a mistake. Measuring risk as the probability of capital gain over the long term is exactly what I care about.

I suspect many other AAII members are like my wife and me: Our estate plan revolves around a generation-skipping trust. Our four adult children are successful and really don’t need an inheritance. So, we are focused on our 12 grandchildren.
—Jim Egbert from Colorado