Confusion About Retirement Income Taxes

Posted on May 12, 2014 | AAII Journal

Many middle-income Americans age 50 and over do not understand the tax rules regarding retirement savings, according to a Banker’s Life Center for a Secure Retirement survey. While 94% of respondents could correctly explain how lottery winnings are taxed, only 29% could explain the tax rules for 401(k) plans.

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Reduce Stock Exposure in Retirement, or Gradually Increase It?

Posted on May 1, 2014 | AAII Journal

For the past 20 years—due to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis (a method of considering many simulations), and just a difficult period of market returns—there has been an increasing awareness of the importance and impact of market volatility on a retiree’s portfolio.

Dubbed “sequence of return” risk, retirees are cautioned that they must either spend conservatively, buy guarantees (e.g., annuities), or otherwise manage their investments to help mitigate the danger of a sharp downturn in the early years.

One popular way to manage the concern of sequence risk is through so-called “bucket strategies” that break parts of the portfolio into pools of money to handle specific goals or time horizons. For instance, a pool of cash might cover spending for the next three years, an account full of bonds could handle the subsequent five-to-seven years, and equities would only be needed for spending more than a decade away. This “ensures” that no withdrawals will need to occur from the equity allocation if there is an early market decline.

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John Maynard Keynes as an Investor: Timeless Lessons and Principles

Posted on April 23, 2014 | AAII Journal

As an active investor, I am always searching for guideposts that would help me avoid the perennial mistakes most investors make.

How do I avoid buying at the top of a market or jumping out when my entire portfolio gets whacked? How do I keep the faith when there’s turmoil aplenty, as was the case in 2008? How important are dividends in a downturn?

In the portfolios of the great economist John Maynard Keynes, I found some answers and reinforcement. Like Keynes, I did nearly everything wrong for years until I discovered a durable path to investment success. I speculated in commodities, dove into individual stocks on a whim and held onto losers far too long.

I found solace, though, when I examined Keynes’ investments, which span two world wars. Even though I and millions of others have weathered brutal markets in this century, they had nothing on Keynes, who was investing money for King’s College (Cambridge University), two insurance companies and private accounts for himself and his famous Bloomsbury friends.

Although he’s better known for his sweeping—and controversial—economic theories, Keynes was a fervent practitioner of capitalism. His rousing success as an investor shows how he embraced markets nearly all of his life.

Viewing his record as an investor, it’s ludicrous to call Keynes a socialist, which he wasn’t. Keynes genuinely enjoyed being a speculator and investor. He called his favorite stocks his “pets.” In addition to thinking through the ideas that would rescue Western economies (as well as Japan and eventually China) after two devastating cataclysms, he managed money for his own portfolio, his friends and several institutions.

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Finding Value and Financial Strength Based on “What Works on Wall Street”

Posted on April 16, 2014 | AAII Journal

Investors seem to be programmed by nature to fail at investing, pouring money into last year’s hot stock, industry or asset class.

James P. O’Shaughnessy provides a detailed examination of investment strategies in the fourth edition of his book “What Works on Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All Time” (McGraw-Hill, 2011).

O’Shaughnessy argues that the majority of investors fail to beat market averages because they do not follow a disciplined approach to investing. Instead, investors let the emotions surrounding the market overpower their judgment and push them off their planned investment course. Investors tend to chase investments with the best recent performance, while ignoring anything that happened more than three to five years ago. Furthermore, O’Shaughnessy makes the case that the markets are not random. The stock market does not move around without any rhyme or reason; it “rewards certain investment strategies while punishing others.”

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Reduce Stock Exposure in Retirement, or Gradually Increase It?

Posted on April 4, 2014 | AAII Journal

For the past 20 years—due to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis (a method of considering many simulations), and just a difficult period of market returns—there has been an increasing awareness of the importance and impact of market volatility on a retiree’s portfolio.

Read more »



Building an All-ETF Subset From the Model Fund Portfolio

Posted on January 21, 2014 | AAII Journal

Over the past three months the stock market has continued its upward climb despite the dangers on the horizon.

The Model Fund Portfolio is up 17.4% year-to-date but lags the S&P 500 index as measured by Vanguard 500 Index fund (VFINX), which is up 19.7%. As we mentioned previously, the lower return is largely due to our two holdings that provide diversification—Fidelity Capital & Income fund (FAGIX) and Vanguard REIT Index ETF (VNQ).

Figure 1 and Table 2 show performance figures over the long term for the portfolio, the index comparison and the Conservative Portfolio, which is 75% Model Fund Portfolio and 25% iShares Barclays 1-3 Year Treasury ETF (SHY).

Table 1 shows the current holdings for the Model Fund Portfolio. There are no portfolio changes at this time.

Our change from WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) to iShares MSCI Frontier 100 ETF (FM) proved timely but the area of frontier markets is still new. We will feel more confident when there are longer-term results. We particularly would like to see how frontier markets perform in a down market.

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Retirement Withdrawals: Can You Base Them on RMDs?

Posted on January 17, 2014 | AAII Journal

The IRS’s required minimum distributions are easy to follow and with a little modification can set the basis for a more optimal withdrawal strategy.

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Lump Sum or Annuity: Which Should You Choose at Retirement?

Posted on January 16, 2014 | AAII Journal

An annuity is attractive if you expect to live beyond normal life expectancy, but a lump sum may be better if you have other sources of income.

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Determining How Much to Allocate to Each Investment

Posted on January 15, 2014 | AAII Journal

Allocate by the percentage of portfolio dollars, not by the number of shares.

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The Role of REITs for Long-Term Investors

Posted on December 26, 2013 | AAII Journal

Real estate investment trusts (REITs) offer diversification benefits relative to stocks, with correlations decreasing over time.

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