The Devil’s Complicating Details

Comments on “For Bucket Portfolios, the Devil Is in the Details,” by Christine Benz in the July 2018 AAII Journal:

What I really like about bucket investing is that it gets the investor to analytically determine their optimal asset allocation between fixed-income and equity investments. I find the 50/50 and 60/40 rules to be arbitrary and not well established. The bucket procedure gets the investor to the optimal allocation for their personal investments.
—Steve Rawlinson from California

Benz points out that the devil is in the details, and I agree with that. I think that part of the “details” is that a couple’s financial circumstances can be far more complicated than is allowed for in the presentation.

My wife and I are long retired (20 years), we have multiple sources of income (Social Security for each, a small pension for me and untapped Roth IRAs for both), but we basically live off of my pension, my Social Security benefits and the required minimum distributions (RMDs) from my IRA. The balance in my IRA is basically unchanged after 17 years of withdrawals. No debts. We are maintaining a 65/35 asset ratio and see no reason to “glide down.”
—Donald Myers from Arizona

Another REIT Resource

Comments on “Conducting Fundamental Analysis of Equity REITs,” by Jaclyn N. McClellan, in the July 2018 AAII Journal:

As a long-time investor in real estate investment trusts (REITs), I would mention one more source that is useful and that is CEFA (www.cefa.com). As the Closed-End Fund Association, it covers more than just REITs; it has a useful portfolio tracker and covers REIT closed-end funds like the Nuveen Real Estate Income Fund (JRS).
—Robert Scott from Missouri

Buying Model Shadow Stock Portfolio Picks

Comments on “The Model Shadow Stock Portfolio’s Origins and Newest Stock,” in the July 2018 AAII Journal:

How is the “maximum price to pay” determined? That value seems to be available for only a few of the stocks in the portfolio.

Since the portfolio only contains stocks that are not followed by other analysts, I have not found any other source for a “fair value” such as that provided by Morningstar for many larger stocks.
—John Borrows from Ohio

The item of most interest to me in your July AAII Journal is the selection of Universal Stainless & Alloy (USAP) for addition to your portfolio, but you provided very little information on your basis for choosing it.
—Arnold Braswell from Virginia

AAII’s Wayne Thorp responds:

The maximum buy price for a Model Shadow Stock Portfolio stock is the highest price at which the stock’s price-to-book-value ratio still meets the initial selection criteria. It is not meant to be a “fair value” calculation.

Based on Universal Stainless & Alloy’s closing price of $23.92 on May 30, we suggested paying no more than $26.88. To calculate the maximum buy price based on the price-to-book-value ratio, multiply the current share price by the ratio of the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 1.0) to the current price-to-book ratio of the stock. The price-to-book ratio for Universal Stainless & Alloy as of May 30 was 0.89, so the calculation is:

$23.92 × (1.0 ÷ 0.89), or $26.88

USAP was selected because it had the strongest price momentum of those stocks that passed the Shadow Stock screen at the end of May that also met the liquidity requirements for AAII’s Model Shadow Stock Portfolio.

This liquidity requirement will differ depending on the size of your portfolio. Per the model portfolio’s stock order guidance, the average daily dollar volume should be at least 10 times the amount needed for your position. So, if you are looking to buy 100 shares of a stock trading at $50 per share, the stock should have a daily dollar volume of at least $50,000 (100 shares × $50 per share × 10). The average daily dollar volume is the average daily trading volume multiplied by the current share price.

To keep up to date on changes to the Model Shadow Stock Portfolio, please sign up for the Model Portfolios Update email at www.aaii.com/email.