Posted on November 30, 2012 | Dividend Investing

Dividend Investing alert for the week ending 11/30/2012 updated.

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Posted on November 30, 2012 | Stock Superstars Report

Stock Superstars alert for the week ending 11/30/2012 updated.

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Misunderstanding the Probability of Winning

Posted on November 30, 2012 | Investor Update

A common behavioral error occurred this week: Many people thought they could increase their odds of winning the $587.5 million Powerball jackpot by purchasing more than one ticket. On the surface, the logic makes sense. Buy two tickets instead of one and you double your odds. Buy 50 instead of one, and your odds are 50 times better. The problem with such logic is that it doesn’t consider whether buying the extra tickets has any significant impact on the probability of winning.

Powerball, like other forms of gambling, has a fixed number of outcomes. The lottery game picks five unique numbers between 1 and 59. A sixth number, the “Powerball,” is then drawn. The Powerball number ranges between 1 and 35. A total of 175,223,510 combinations can be formed. Since there are a fixed number of combinations, it is easy to calculate the probability of winning the jackpot for any number of tickets purchased. We simply need to divide the number of tickets purchased (assuming each has a different combination of numbers) by 175,223,510.

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Upcoming Chapter Meeting: AAII Twin Cities

Posted on November 29, 2012 | Local Chapters

Date: Thursday, December 6, 2012
Topic: Planning For Income and Estate Tax For 2012 and Beyond: Is It Possible?
Speaker: Todd J. Koch, CPA, MBT, CFP, Partner, John A. Knutson & Co., PLLP

There was a time when major income tax and estate tax changes happened infrequently. Now they have been happening with greater frequency, which makes planning even more important and more difficult. This presentation is designed to give you a brief history of these taxes to help you plan for what should be done now for the potential changes yet this year, changes already enacted for next year and potential changes on the horizon.

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AAII Sentiment Survey: Bullish Sentiment Rises Above 40%

Posted on November 29, 2012 | AAII Survey

Bullish sentiment registered above 40% for the first time since August 23, 2012 in the latest AAII Sentiment Survey. Bearish sentiment continues to stay above its historical average, however.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.1 percentage points to 40.9%. This reading ends a 13-week streak of optimism coming in below its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.3 percentage points to 24.7%. Even with the increase, this is the 10th time in the past 11 weeks that neutral sentiment is below 30%. The historical average is 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.4 percentage points to 34.4%. This is an eight-week low. Even with the drop, pessimism is above its historical average of 30.5% for the 14th consecutive week and the 30th out of the last 34 weeks.

More individual investors are describing themselves as bullish than bearish for just the second time in the past 10 weeks. The bull-bear spread, which measures the difference between bullish and bearish sentiment, is also at its most positive level since August 23, 2012. The current bull-bear spread is 6.5.

Though this week’s survey signals an increase in the level of optimism, it is important to note that this is only the second time since March 29, 2012, that bullish sentiment is above its historical average of 39%. Individual investors remain cautious and failure by Congress and the president to avoid the fiscal cliff would likely have a damaging impact on individual investors’ moods. Though some AAII members are encouraged by signs of continued economic growth and the preliminary holiday shopping data, many remain concerned about the pace of economic growth, ongoing political gridlock and Europe’s sovereign debt crisis.

This week’s special question asked AAII members what this year’s holiday shopping trends are saying about the economy. Responses were mixed, with the largest group of respondents saying the early data shows signs of an improving economy, or at least better consumer sentiment. Several members thought consumers are either ignoring the macro environment (including the possibility of the fiscal cliff fears) or are just tired of not spending. Some respondents are worried that consumers are spending money they do not have. There were also several who thought the initial data did not provide much insight into the overall health of the economy.

Here is a sampling of the responses:

  • “With holiday spending up slightly, consumers are not letting the fiscal cliff threat spoil their holidays.”
  • “I’m encouraged by the volume of shoppers reported by the media, but I hope that folks are not spending themselves back into difficult situations.”
  • “Consumers have become more willing to spend.”
  • “Consumers don’t have much “extra” money, so they are shopping for the lowest priced products.”
  • “It is very hard to tell as of now, but aside from Black Friday, I feel that people are being careful with their money.”
  • “Black Friday does not a shopping season make.”

The historical average for neutral sentiment was adjusted down by a half a percentage point this week, from 31% to 30.5%. The historical average for bearish sentiment was revised up, from 30% to 30.5%. These revisions reflect a trend we have seen develop in the weekly readings. Over time, we make additional adjustments to the historical averages as the data warrants.

This week’s AAII Sentiment Survey results:

  • Bullish: 40.9%, up 5.1 percentage points
  • Neutral: 24.7%, up 1.3 percentage points
  • Bearish: 34.4%, down 6.4 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online at: http://www.aaii.com/sentimentsurvey

Retiree Stock Allocation Recommendations: Do You Fit the “Mold”?

Posted on November 28, 2012 | Asset Allocation

How much of your portfolio should be invested in stocks if you are a retiree living off of your retirement savings?

The answer depends on how closely you fit the typical “mold.”

At first blush, there would appear to be a fair amount of disagreement among the “experts” on this seemingly basic question. But upon closer examination, it is clear that many of these disagreements stem from differing assumptions about the typical retiree.

In this article, we’ll take a look at the basic disagreements that exist among professionals. A better understanding of the assumptions that underlie their models—and how those assumptions affect the recommendations—can help you determine which “mold” comes closest to fitting your own situation.

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Sell of the week 11/28/2012

Posted on November 28, 2012 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Patterson Companies (PDCO) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week


Posted on November 27, 2012 | Weekly Features

This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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Buy of the Week 11/27/2012

Posted on November 27, 2012 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Aflac (AFL) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the Week

How Investors Miss Big Profits

Posted on November 26, 2012 | AAII Journal

Back in 1993, a curious thought crossed my mind while analyzing the federal regulations that were new at the time.

Mutual funds were permitted to report investment returns for one, three, five and 10 years (“alpha”), but how many investors actually kept their investments unchanged for those specific periods? If all investors did not hold on to their investments for those precise periods, then they had to be doing better or worse than was being reported.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Simply stated, alpha represents the value that a portfolio manager adds to or subtracts from a fund’s return. Investors’ alpha is the value a retail investor adds to or subtracts from the alpha delivered by the portfolio manager. The return of the respective index is considered to be zero alpha, so any excess over the index is considered positive investor alpha.

I developed a calculation that would measure whether mutual fund investors were actually earning more or less than the reported alpha. In 1994, DALBAR issued the first Quantitative Analysis of Investor Behavior (QAIB), showing that investors had severely underperformed the average mutual fund alpha! This underperformance continues to this day.

Investors were actually missing much of the alpha that mutual funds had earned. Using the S&P 500 index to approximate the returns that equity mutual funds produced, investors were leaving between 10.97% and 4.32% on the table, as Table 1 shows.

This shocking finding of underperformance led to research to understand how and why millions of investors were missing so much of the alpha and, ultimately, what they could do to capture more of the profits that funds were earning.

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