How to Use the M-Score

Comments on “Detecting Earnings Manipulation With the M-Score,” an interview with Messod D. Beneish, Ph.D., in the September 2023 AAII Journal:

The M-Score sounds excellent. Is there a website that uses it?
—Mark H. from Canada

Messod Beneish responds:
My M-Score calculator is pretty friendly and can be found at: https://apps.kelley.iu.edu/Beneish/MScore/MScoreInput.

Taxes on Withdrawals

Comments on “The Importance of Considering Marginal Taxes When Taking Withdrawals,” by William Reichenstein, CFA, and William Meyer, in the September 2023 AAII Journal:

I use my tax-filing software to test various hypothetical scenarios for future years. One drawback: It ignores future tax changes such as inflation adjustments to various thresholds. I can test claiming Social Security at full retirement age, waiting until age 70 or choosing an interim age.

I can also test the impact of selling stocks in a taxable account with long-term capital gains, something this article specifically excludes. I found that I can sell appreciated stock in a taxable account and pay 0% tax as long as taxable income is less than $89,250 (for 2023, long-term gains only, married filing jointly). If I don’t make any withdrawals from tax-deferred accounts and wait to claim Social Security until age 70, that won’t be hard to do. If I wait and sell the stock after required minimum distributions (RMDs) start, the capital gains tax increases to at least 15%. Thus, my plan is to liquidate most of my taxable brokerage account each year before age 70, take long-term capital gains and pay $0 in tax in those years.
—Victor S. from North Carolina

During the 40.7% “tax torpedo,” my ordinary income is being taxed at 22% and my Social Security is being taxed at 18.7%. Another way to look at it is that the retiree Nancy in this article has a very small window of $6,498 of income (less than 10% of her $77,306 total income) that is subject to this 40.7% tax torpedo, and on the other side of it, Social Security is once again tax free. Finally, even at the top of the tax torpedo, Nancy has an effective tax rate of 10% on the total amount of her income, not really something to be overly concerned about.
—Dave G. from Texas

Asset Allocation Funds

Comments on “Using Fidelity Funds to Fill Your Asset Allocation Needs,” by Charles Rotblut, CFA, in the September 2023 AAII Journal:

Why no mention of the Fidelity Puritan fund (FPURX), open since 1947? This asset allocation fund is my choice for an all-in-one stock, bond and cash fund for investors who cannot spend the time chasing trends. It does not cover international, but as a domestic fund it does the job.
—Neil S. from Texas

Charles Rotblut responds:
For this exercise, we wanted to highlight Fidelity funds that matched the specific categories in AAII’s Asset Allocation Models. This meant excluding asset allocation funds like Fidelity Puritan.

Factors and Trends

Comments on “Why It Makes Sense to Pair Momentum With Value in a Portfolio,” an interview with Dan Villalon, in the September 2023 AAII Journal:

An example of a trend-following strategy is the Magnificent Seven. Traders who employ a trend-following strategy do not aim to forecast or predict specific price levels. When their reasons/rules say a trend has been established, they “jump on the trend and ride it.” There is a social media corollary called “sliding into someone’s DMs,” or direct messages.
—Barry J. from Texas

Seems like trend following is nothing more than heat chasing. It works until it doesn’t (momentum crashes). If this actually worked over the long term, we would see them at the top of the list when looking at active funds, and index funds would be shrinking in size. They’re not, and index funds are still growing.
—John L. from New Jersey

Investing in Options

Comments on “Options Investing in Inflationary Times: A Leverage Boon or Bubble?,” by Jenna Brashear, in the September 2023 AAII Journal:

I am a conservative investor and rarely bet on unfettered increases in stock prices, therefore I subscribe to a covered call approach to my portfolio. This approach allows me to protect my returns from downside risks with the premiums from writing calls while also giving me some current income. I add this to a rich dividend approach.
—Robert R. from Texas

In my opinion, covered calls and dividend-heavy portfolios are poorly diversified, suboptimal strategies. In your 50s, you need maximum growth as you have 15 to 20 years until retirement and are probably at the height of your career and earnings. Investing 100% in a total stock market index fund would be a better choice for maximizing wealth.
—John L. from New Jersey