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Computerized Investing

AAII's New Model Portfolios

Follow a small-stock portfolio and a fund portfolio using a few simple rules.

by AAII Staff | January 2004

For over 25 years, AAII’s major emphasis has been on investment education and information. Over the years, however, we became increasingly aware that many of our members wanted more specific guidance in developing an effective investment program.

Over the next months, you will see this initiative develop in AAII.com’s Model Portfolios area.

Each approach to selecting stocks and mutual funds shares the same philosophy: an emphasis on consistency, risk control, and selections that are ideal for individual investors, not institutions.

AAII Model Portfolios can be found at www.aaii.com/aaiiportfolios, or by simply clicking on the Model Portfolios link under Tools in the AAII.com navigation bar.

   The Individual Investor’s Shadow Stock Portfolio
CLICK ON IMAGE TO
SEE FULL SIZE.
The Individual Investor’s Shadow Stock Portfolio (formerly the Beginner’s Portfolio) provides guidance for investing in the promising micro-cap value sector of the market. Here, more specific direction is provided as to how this model portfolio, and variations on it, fit into an investment program.

Shadow Stock Portfolio Rules

  1. No bulletin board or pink sheet stocks will be purchased.

  2. Price-to-book-value ratio must be less than 0.70. (This figure will change gradually with changes in overall market values.)

  3. Market capitalization must be between $17 million and $125 million. (This figure will change gradually with changes in overall market values.)

  4. The firm’s last quarter and last 12 months’ earnings from continuing operations must be positive.

  5. No financial stocks or limited partnerships will be purchased.

  6. No foreign stocks will be purchased because of different accounting and/or withholding tax on dividends.

  7. The share price must be greater than $4.

  8. In order to reduce trading by avoiding stocks that are forever marginal, any stock that was sold within two years will not be rebought.

  9. Note first item under stock order rules concerning spreads when buying shares.

  10. Price-to-sales ratio must be less than 1.2.

   The Individual Investor’s Fund Portfolio
CLICK ON IMAGE TO
SEE FULL SIZE.
The model fund portfolio shares the same philosophy as the Individual Investor’s Shadow Stock Portfolio. Over time, AAII will examine the different selection criteria, discuss variations that can affect risk, and show how these stock funds can be combined with low-risk holdings to match a desired overall risk profile.

Fund Portfolio Rules

  1. It must be a pure no-load fund.

  2. It must have been in existence for at least 10 years.

  3. It must have had higher returns than the S&P 500 index on both an absolute and risk-adjusted basis for the most recent five-year and 10-year periods.

  4. It can’t have been down for two calendar years in a row.

  5. It must never have had a three-year period with negative returns.

  6. It must be primarily a domestic common stock fund, although it may have some other investments in its portfolio.

  7. It must have net assets of less than $2.5 billion.

  8. It must have an expense ratio of less than 1.25%.

  9. It must currently be open to individuals.

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