AAII journal

JULY
2022

Amer ican Association of Individual Investors

Geraldine
Weiss’
Strategy for Discovering
Promising Dividend
Stocks

www.aaii.com
Volume XLIV ALSO INSIDE:
No. 7 x Using Benjamin Graham to Hunt for Bear Market Bargains
x Adhering to the Shadow Stock Portfolio’s Rules
x How to Approach Financial Planning as an Empty Nester
 Using the PRISM Process
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Revise as
Step 1: Necessary
Prioritizing Your Goals If you’ve been following along with us, last month we wrapped up Step M,
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Step 2: Building Process? As we’ve mentioned previously, PRISM is meant to be
Recognizing Your Risk
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whenever you need to.
Do you have a new goal that needs to be funded by
Step 3: your investments like paying off a mortgage, funding
Identifying Your Investment
Management Preferences college education or buying a vacation home? If
so, you can go through each step’s worksheets to
Adjust see if your risk tolerance, management preferences,
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Necessary investment selection or allocation also needs to
Step 4:
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 Inside
FEATURES »
JULY 2022
COVER ARTICLE »
7 Solid Long-Term
Results From the
Weiss Blue-Chip
Dividend Screen
By Jack Gilleland NOTES & OPINIONS »
A screen built on the
premise that comparing
current dividend yields
to historical norms for
blue-chip companies can
allow investors to take
advantage of a stock’s
cycle of overvaluation and
undervaluation.
ONLINE EXCLUSIVE »
AAII journal American Association of Individual Investors
Founded in 1978
11 Cybersecurity Stocks & ETFs Offer Exposure to a High-Growth
Industry
By Sean Murphy
Cybersecurity companies have experienced rapid growth in revenues, but be
prepared to “pay up” in valuation.
16 First Cut Stocks Benjamin Graham’s Defensive Investor Non-Utility
Screen
17 First Cut Stocks Benjamin Graham’s Defensive Investor Utility Screen
18 AAII How-To How to Analyze Earnings Surprises
20 Mutual Funds & ETFs The Benefits and Risks of Short-Term Bond Funds
25 Financial Planning Tips for Empty Nesters
By Charles Rotblut, CFA
A thorough review of your wealth-building plan is called for when children
become financially independent.
29 Adhering to Shadow Stock Portfolio Rules Is Vital in Shaky Times
By John Bajkowski
Small-cap returns have been greater than that of large caps over the long term, but
there are often streaks of outperformance followed by underperformance.
2 Editor’s Note Bear Markets Are a Normal Part of Investing
3 AAII Investor Surveys
x Investor Sentiment
x Asset Allocation
4 Dispatches
x Illustrating Trends: CAPE Ratio Is High, but Down From Peak
x Environmental Regulation Uncertainty Pushes Bond Yields Up
x Mercury Retrograde Adversely Affects Stock Returns
6 Letters
x Investing in I Bonds
x Individualizing ESG
x Missing Robo-Adviser
15 AAII Community
x Never Navigate Uncertain Markets Alone
x Field Notes From the Chapters
33 Member News
x Members Learn and Share Through PRISM Academy
x AAII Community Grows to Address Member Needs
x AAII Journal Online Gets a Facelift
x Academic Awards: Fostering Investment Education and Research
x AAII Financial Summary
x Supplemental Benefits
x AAII Privacy Policy
Visit www.aaii.com/journal to read this online exclusive. 
Investor Professor ​Delving Into the Definition of the CAPE Ratio
AAII.COM/JOURNAL

E D I T O R’ S N O T E
TABLE 1
Charles Rotblut, CFA Bear Markets Between 1929 and 2021
Editor of the AAII Journal
Number 17
@charlesraaii
Average Decline 37.9%
Average Decline (Post WWII) 32.7%

Bear Markets Are a Number of Bears With a Drop of <40%

Number of Bears With a Drop of >40%
11
6

Normal Part of Investing Source: S&P Capital IQ.

Dividend-paying stocks can help cushion the blow of

This is just the second time that the S&P 500 index is
bear markets and protect a portfolio against inflation. The
in a bear market since I became editor of the AAII Journal
Weiss Blue Chip Dividend Yield screen has been a great
in 2010. A bear market is defined as a drop of at least 20%.
way to find attractive dividend stocks. This AAII screen—
S&P Dow Jones Indices defines a bear market “as a 20%
which is available to all AAII members on AAII.com—is
decline in the S&P 500 index from its previous peak.” Bear
based on Geraldine Weiss’ 1988 book “Dividends Don’t
markets end “when the index reaches its low and subse-
Lie.” The Weiss screen has the 10th lowest risk index out
quently rises by 20%.” This 20% rebound starts a new bull
of the 60 AAII stock screens, yet it has beaten the S&P 500
market, which lasts until the S&P 500 “reaches its high
since its inception in 1988 (9.4% versus 5.9% annualized
and subsequently declines by 20%.”
through May 31, 2022).
Bear markets are a normal part of investing. Large- and
The “grande dame of dividends” died in late April 2022
small-company stocks wouldn’t have long-term annual-
at the age of 96. Weiss was both a successful investor and
ized returns of 12% and 16%, respectively, if there wasn’t
a trailblazer. As Mark Hulbert explained on MarketWatch
the risk of incurring a loss of capital. But then again, any
several years ago, she first penned her newsletter Invest-
decision you make about what to do with your savings—
ment Quality Trends under the name of G. Weiss in 1966. It
including holding them in cash—involves some type of
wasn’t until she appeared on “Wall Street Week with Louis
risk.
Rukeyser” in 1977 that subscribers found out “G.” stood
We individual investors can’t control what types of mar-
for Geraldine and not, say, Gerald or George. In honor of
ket conditions will exist over our lifetimes. We can control
Weiss, we are featuring our screen based on her investing
the decisions we make and align our decisions with our
strategy on page 7.
goals (aka the PRISM Wealth-Building Process). Long-term
Our 60 screens—including the AAII Graham Defensive
goals require the growth of capital that stocks provide.
Investor Utility and AAII Graham Defensive Investor Non-
Short-term expenditures require cash to preserve capital.
Utility screens featured on pages 16 and 17—are a benefit
In between, bonds provide both income and a counterbal-
available to all AAII members. Use the AAII screens to find
ance against the volatility of stocks.
stocks whose valuations may be lower than they should be.
Still, when the current market will bottom is “the
To access the screens, go to www.aaii.com/screening.
$64,000 question” many of you likely have.
For those of you reading this in print, consider switch-
It’s a tough question to answer in the AAII Journal
ing to digital delivery of the AAII Journal while you are
because it will be almost two weeks before this issue
on AAII.com. You get the latest issue sooner, you can
is made available on AAII.com at the beginning of the
save your favorite articles and you can view related video
month, and even longer before print copies arrive in mail-
content. To make the switch, go to My Account on AAII.
boxes. Any market prediction I make here may look silly by
com, scroll down to My Subscriptions and click “Opt Out”
the time you read it.
by AAII Journal. You can also switch from print to digital
Timing aside, data from CFRA Research shows an aver-
delivery by contacting Member Services at members@
age bear market decline in the S&P 500 of 37.9% for the
aaii.com or 312-676-4307.
past 17 bear markets. Sam Stovall at CFRA calculates the
post–World War II average as a drop of 32.7%. Nearly two-
Wishing you prosperity and good health,
thirds of all bears since 1929 have incurred total drops of
less than 40%. The average decline of these “garden vari-
ety” bears is 27.7%. While no one has a working crystal ball,
these numbers should help you to set some expectations.

2 AAII JOURNAL J U LY 2 0 2 2
 AAII.COM/JOURNAL

American Association of Individual Investors

Founded in 1978

EDITORIAL STAFF AAII Investor Surveys

Vice President, Editor Founder S E N T I M E N T S U RV E Y
Charles Rotblut, CFA James B. Cloonan, Ph.D.
Stock market sentiment indicators are contrarian. Unusually low optimism
Managing Editor Chairman is typically followed by above-average returns. Unusually high optimism
Jean Henrich John Markese, Ph.D.
is typically followed by below-average returns.
Art Director President
Annie Prada John Bajkowski Note: Numbers may not add up to 100% because of rounding.

Assistant Editor Senior Financial Analyst,

Anine Sus Vice President
Wayne A. Thorp, CFA
Data represents what direction members feel the
Financial Writer
Matthew Bajkowski Financial Analyst stock market will be in the next six months.
Derek Hageman
Financial Writer,
Community Manager Assistant Financial Analysts Sentiment Votes
Jenna Brashear Jack Gilleland Week Ending
Bullish Neutral Bearish
Matt Markowski
Contributing Editors
Brian Haughey, CFA Research Interns 6/15/2022 19.4% 22.2% 58.3%
Craig Israelsen, Ph.D. Zach Banning
Paul Merriman Issac Deleon 6/8/2022 21.0% 32.1% 46.9%
Chris Pedersen Sean Murphy
Raymond A. Rondeau
6/1/2022 32.0% 30.9% 37.1%
EDITORIAL POLICY
It is not the policy of the AAII Journal to promote any specific 5/25/2022 19.8% 26.7% 53.5%
investments or techniques of analysis. The opinions of authors
are their own and not necessarily those of AAII. It is the editorial
opinion of the Journal that no one area of investment is suitable Historical View
for all investors and that no single method of evaluating invest-
ment opportunities has proven to be successful all of the time. Historical Averages 38.0% 31.5% 30.5%
AAII is not a registered investment adviser or a broker/dealer.
Readers are advised that articles are provided solely for infor- 1-Year Bullish High: 48.6% Week Ending 6/30/2021
mational purposes and should not be construed as an offer to
sell or the solicitation of an offer to buy securities. The opinions
and analyses included herein are based on sources believed to 1-Year Neutral High 40.6% Week Ending 3/30/2022
be reliable and written in good faith, but no representation or
warranty, expressed or implied, is made as to their accuracy, 1-Year Bearish High 59.4% Week Ending 4/27/2022
completeness, timeliness, or correctness. Neither we nor our
information providers shall be liable for any errors or inaccura-
cies, regardless of cause, or the lack of timeliness of, or any
delay or interruptions in, the transmission thereof to the users.
All investment information contained herein should be indepen-
dently verified.
A S S E T A L LO CAT I O N S U RV E Y
Past performance is no guarantee of future results. Investment
information provided may not be appropriate for all investors.
Investment information is provided without consideration of May Historical
your financial sophistication, financial situation, investing time 2022 Average
horizon, or risk tolerance. Readers are urged to consult with
their own independent financial advisers with respect to any
investment.
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D I S PAT C H E S : I L L U S T R AT I N G T R E N D S

CAPE Ratio Is High, but Down From Peak
The cyclically adjusted price-earnings (CAPE) ratio is
a widely followed, long-term measure of the stock mar-
ket’s valuation. Unlike traditional valuation measures,
this price-earnings ratio uses 10 years of real (inflation-
adjusted) earnings in its denominator. The numerator
(price, or in this case, the value of the S&P 500 index) is
also inflation-adjusted.
A look-back period of 10 years is used to smooth out
volatility in earnings. This long look-back period helps to
smooth out the volatility a single year can have on earn-
ings and, thereby, valuations.
Since its creation by Nobel laureate Robert Shiller and
John Campbell, the CAPE ratio has been used to gauge
expected returns for the stock market over the next five
to 10 years. As of mid-June, the CAPE ratio was 32.5.
Though down from its recent (November 2021) peak of
38.6, it is still far above the post–World War II median of
18.7. The current CAPE ratio is also above its post-1981
long-term interest rate peak median of 23.7.
When we asked Shiller in 2013 what investors should
do when the CAPE ratio is high, he responded by say-
ing, “You have to compare the alternatives” to stocks. (The
CAPE ratio was 23.3 at that time.) More recently (June
2022), WealthManagement.com quoted Shiller explaining
that he was “not that alarmed by a CAPE ratio in the low
30s at this time” while speaking at the Wealth Management
EDGE conference. Shiller then added, “I think the mar-
ket is highly priced now—not super highly priced—but
everything is highly priced, including real estate.”
For more on the CAPE ratio, see this month’s online
exclusive Investor Professor column, “Delving Into the
Definition of the CAPE Ratio,” at www.AAII.com/Journal. ▪

FIGURE 1

Shiller CAPE Ratio

50 18
2000
45 16
1981
Price-Earnings Rao (CAPE P/E 10)

40
14

Long-Term Interest Rates (%)

35
1929 32.5 12
30
1901 10
25 1966
8
20
CAPE 6
15

10 4
Long-Term
5 Interest Rates 2
1921
0 0
1860 1880 1900 1920 1940 1960 1980 2000 2020 2040

Source: Robert Shiller. Data as of June 13, 2022.

4 AAII JOURNAL J U LY 2 0 2 2

D I S PAT C H E S
Environmental Regulation Uncertainty
Pushes Bond Yields Up
Uncertainty about future environmental regulatory
changes is raising the perceived risk of bonds from issuers
with poor environmental profiles or high carbon emissions.
As a result, these bonds are assigned lower credit ratings
and investors are demanding higher yields from them.
Researchers used two criteria to determine how the
environmental profiles of corporations affected the per-
ception of their credit risk. One was environmental, social
and governance (ESG) from third-party ratings agency
Sustainalytics. The second was carbon emissions data
from the Carbon Disclosure Project (CDP). Companies
were assigned a score of 0 to 100, with a higher numeri-
cal score indicating stronger environmental performance.
Additionally, credit ratings were assigned on a range of
1 to 22. Each numerical value represented a specific
Moody’s rating, with 1 matching the lowest rating of D and
22 matching the highest rating of Aaa.
Bond issuers with better environmental emissions
scores tend to have stronger credit ratings. Specifically, an
increase in an issuer’s environmental score of one point is
associated with a statistically significant 0.027 increase in
credit ratings (higher numbers indicate a better credit rat-
ing). The reverse is true for greater carbon emissions. A
one-ton increase in carbon intensity per $1,000 of revenue
decreases a firm’s credit rating by 0.514. The relationship
signals pricing in of carbon risk by the bond markets.
Following the 2015 Paris Climate Agreement, a signifi-
cant increase in perceived regulatory risk for companies
with high emissions was observed. Consequently, firms
located in states that have more restrictive environmental
procedures showed a more significant association with the
Credit Ratings of High Carbon Emission Industries’ Bonds
Before and After the Paris Agreement
(better credit ratings are designated by high numbers)
AAII.COM/JOURNAL
trend of decreased credit ratings and increased spreads.
When examining corporate bonds, potential environ-
mental risk is a concern to both credit ratings analysts and
investors. Increased environmental regulation is associ-
ated with increased costs, and those who are deemed the
worst offenders in terms of emissions are more likely to
see those costs reflected in their bond prices.
Source: “Climate Regulatory Risk and Corporate
Bonds,” by Lee H. Seltzer, Laura Starks and Qifei Zhu;
National Bureau of Economic Research, 2022. ▪
Mercury Retrograde Adversely Affects
Stock Returns
Stock market returns are lower during the periods when
it appears that Mercury’s rotation is backward than at other
times of the year.
Though the relationship between the planet’s position
and the performance of equity markets on Earth is not
causal, there is a pattern of weaker stock market perfor-
mance when Mercury is in retrograde.
Mercury normally travels across the sky from west to
east; however, around three or four times each year, it
appears to travel backward, which is known as Mercury
retrograde. In Greek mythology, Mercury symbolizes the
god of financial gain, commerce, communication and traf-
fic. Astrologers have thus speculated that Mercury retro-
grade is bad for stock performance. Some investors are
cautious during this time, demanding a higher market risk
premium than in other periods.
Researchers gathered historical performance data from
48 countries’ stock market indexes to see if there was any
validity to the belief of lower stock returns when Mercury is
in retrograde. Data was used from 1973 through 2019. The
researchers found that stock market returns are 3.33%
lower annually during Mercury retrograde periods.
The study’s authors devised what they call “channels”
to help explain this phenomenon: the astrological theory
channel and the investor belief channel.
The astrological theory channel supports the notion
of Mercury retrograde affecting certain activities. Data
on traffic accidents or firm-specific news showed no
significant change during such periods relative to non-
retrograde periods. Thus, the astrological theory does not
hold up.
The premise of the investor belief theory is that if inves-
tors believe they will lose money by investing during peri-
ods when Mercury is in retrograde, they will refrain from
holding investments. The remaining investors demand a
higher risk premium as compensation to stay invested.
This higher premium lowers stock prices.
Source: “Long Live Hermes! Mercury Retrograde and
Equity Prices,” by Yanling Qi, Hang Wang and Bohui
Zhang; SSRN, April 2022. ▪
AAII JOURNAL J U LY 2 0 2 2 5

LETTERS
Investing in I Bonds
Comments on “Why I Bonds Have
Appeal When Inflation Is Rising,” by
Charles Meyer, MBA, CFP, in the June
2022 AAII Journal:
Since my wife and I are retired and
in our 70s, we are buying U.S. I sav-
ings bonds for long-term health care
needs. We max out our yearly pur-
chases at $30,000 (both Social Secu-
rity and trust). The Federal Reserve
tax deferral, being state and local
tax-free, along with compounding,
helps as an inflation hedge for ever-
increasing health care costs. Health
can deteriorate quickly, so we don’t
feel that at-risk equity investments are
appropriate.
—Thomas W. from Arizona
Thomas, you wrote that you are
able to purchase $30,000 by pur-
chasing $10,000 in the name of a
trust. Is this a revocable trust with
your Social Security number (SSN)
or is it an irrevocable trust with its
own employer identification number
(EIN)? I found the following in a post at
Bogleheads.org: One can have an
individual account and an entity
account (e.g., trust) using the same
SSN. It is allowed because they are
different types of accounts.
—Peter L. from California
I agree with commenters lament-
ing the dismal TreasuryDirect.gov
website. My bigger concern is with the
inscrutability of interest accruals in the
account. I log in to check my account
every few months since my first pur-
chase in January this year. So far,
their “system” has added interest in
strange amounts twice, with no expla-
nation, dates or time periods regard-
ing the additions.
—Julian B. from Texas
Julian, yes, the way the Treasury
calculates the interest may seem
6 AAII JOURNAL J U LY 2 0 2 2
Join the Discussion.
ONLINE: Log in to comment on current and past AAII Journal articles at AAII.com/journal.
EMAIL: journal@aaii.com.
Commentary referenced here can be accessed at AAII.com. We reserve the right to
edit all published comments.
strange but it is completely predict-
able if you have the correct formula.
I have built a spreadsheet that tracks
my payments, and it comes out to the
penny every month. It took me months
to sort out both the correct number of
significant digits to use to convert the
consumer price index for all urban
consumers (CPI-U) to interest rates
and then to understand that each of
the bond’s interest rate payments
is built from a $25 bond that is com-
pounded every six months in a rolling
fashion based on the start date of your
bond.
For example, if you bought a
$2,000 I bond in December 2021, the
first six interest payments are $12,
$11.20, $12, $12, $12 and $12, giv-
ing you a total compounded amount
of $2,071.20 at the end of six months.
This would be the total “on paper”
you would have as of June 1, 2022.
However, what you would see in your
account in June would be $36 less
because of the three-month penalty.
—Dave G. from Texas
Individualizing ESG
Comment on “Addressing the Chal-
lenges ESG Investors Face,” an inter-
view with Larry Swedroe, in the May
2022 AAII Journal:
Looking through the prism of a
socially responsible investing (SRI)
professional, I was very pleased
with the overall coverage of the field.
However, I was concerned with the
remarks regarding investors and
energy stocks. At several points, Swe-
droe refers to socially responsible
investors “screening out energy com-
panies.” He says that would be a “bad
decision.” Left unchallenged, this may
cause some confusion among your
readers.
SRI does not screen out the entire
energy sector. Companies that pro-
duce power from wind turbines and
solar panels are energy companies.
Our clients invest in energy, but it is
renewable energy, not oil, coal or gas
energy. I suggest that using the term
“fossil fuels” in the future would clarify
what SRI screens out when it comes
to the energy sector.
—Ron F. from California
I immediately distrust any firm or
individual’s rating of so-called SRI
or environmental, social and gover-
nance (ESG) investment strategies. I
do not use such ratings in my invest-
ment research or stock analysis. I also
distrust and resent huge stockholders
dictating social policy on “my” compa-
nies. BlackRock and CalPERS should
stay out of the social responsibility
opinion realm. This interview confirms
rating inconsistencies, and recent arti-
cles and opinions in The Wall Street
Journal point out the difficulties of
such rating strategies.
—Bill J. from Texas
Missing Robo-Adviser
Comments on “Gauging the Current
Robo-Advisers on Features &
Returns,” by Ken Schapiro, in the
June 2022 AAII Journal:
What’s missing from this list of
robo-advisers is one that is tracked
and audited by HulbertRatings.com,
had performance of 7.5% as of March
31, 2022, for the trailing 12 months
and had an annual average return of
19.52% for the trailing three years.
That performance of BuySellDo
Nothing.com compares very favorably
with the “equity only” results on a trail-
ing 12-month basis and exceeds the
best in this article on a trailing three-
year basis.
—Michael D. from California

A A I I STO C K I D E AS
Solid Long-Term
Results From the
Weiss Blue-Chip
Dividend Screen
A screen built on the premise that comparing
current dividend yields to historical norms
for blue-chip companies can allow investors
to take advantage of a stock’s cycle of
overvaluation and undervaluation.
BY JACK GILLELAND
Famed investment adviser Geraldine Weiss passed
away at age 96 in April 2022. Weiss was crowned “the
grande dame of dividends” and had been regarded as the
“dividend detective.”
Weiss’ approach, as outlined in an AAII stock screen
here, can be attributed to her book “Dividends Don’t Lie”
(Longman Publishing, 1988), co-authored with Janet Lowe.
The methodology outlined in the book served as a game
plan for the Investment Quality Trends investment advi-
sory newsletter, which she started and ran for close to 4o
years before selling it to Kelley Wright when she retired.
We first presented Weiss’ approach to investing in blue-
chip stocks in the November 1996 issue of AAII Journal. We
created a stock filter based upon her approach that AAII
members can follow at the Screening section of AAII.com.
Our Weiss screen has shown solid long-term performance,
with an average annual price gain of 9.4% since 1998. The
S&P 500 index has gained 5.9% over the same period. As
shown in Figure 1, the approach has lagged the S&P 500
during bull markets, but has outperformed the index dur-
ing bear market periods.
The Philosophy
Weiss was a value investor with a focus on blue chips,
which are defined as large, well-known companies with a
history of growth and dividend paying and that offer qual-
ity management, products and services. Weiss primarily
looked toward the dividend yield (current annual indicated
AAII.COM/JOURNAL
Jack Gilleland is an assistant financial
analyst at AAII. Find out more at www.aaii.
com/authors/jack-gilleland.
dividend payment divided by share price) to identify when
stocks are undervalued or overvalued. Weiss felt that, over
time, stocks repeatedly fluctuate between high and low
values best indicated by dividend yield. A careful study of
a stock will reveal these extremes, thereby providing guid-
ance on future stock turning points.
Dividends help to separate the speculators from the
investors in the marketplace. Investors are only willing to
risk their capital in a company
when they can be reasonably
assured of getting an attrac- The dividend payment
tive return on their invest- serves as a direct source
of profit for the investor
ment. The dividend payment
and also acts as a
serves as a direct source of
valuable tool to measure
profit for the investor and also
the relative attractiveness
acts as a valuable tool to mea- of a company compared to
sure the relative attractiveness its own historical pattern.
of a company compared to its
own historical pattern. The
dividend yield becomes a useful measure when you can be
assured that the company is committed to its dividend and
has the financial strength for its dividend payments.
Identifying Candidates
Weiss limited her analysis to blue-chip companies
because her research showed that there was just as much
profit potential in high-quality stocks as in low-quality
stocks. However, high-quality stocks often carry less risk,
making them a more attractive option.
Weiss felt that blue-chip companies have a reputation
for dependability as well as offering the best potential for
increasing shareholder value through dividend growth
and capital gains.
The Weiss blue-chip universe has these characteristics:
» The dividend must have increased a minimum of
five times in the past 12 years;
» In at least seven of the last 12 years, corporate earn-
ings should have improved;
» Company must have paid dividends, with no inter-
ruptions, for the past 25 years;
» Shares outstanding should number at least five
million;
» Shares must be held by at least 80 institutions; and
» The stock must carry an S&P quality ranking no
lower than A.
AAII JOURNAL J U LY 2 0 2 2 7
AAII.COM/JOURNAL

History of Dividend Increases
A reliable way to recognize good management is by its
long-term track record. Therefore, the first criterion speci-
fies that dividends must have increased a minimum of five
times in the past 12 years. A substantial upward trend of
increased dividends is made possible through a company’s
ability to have successful revenue growth and earnings
growth.
Most screening systems available to individual inves-
tors do not have a deep enough historical record to look for
updates in five out of the last 12 years. We are using AAII’s
Stock Investor Pro fundamental stock screening and research
database to implement the Weiss screen. The database pro-
vides seven fiscal years of income statement data. Since
the Weiss approach looks for increases 42% of the time, we
specified three increases out of the last seven years.
Earnings Strength
Earnings growth helps to fuel dividend growth, so Weiss
specified that corporate earnings should have increased in
at least seven of the last 12 years. It’s another indication
of a well-managed company, signaling that a company
FIGURE 1
Performance of the Weiss Blue Chip Dividend
Screen
Growth of $1,000
can survive the tough years and prosper in the good ones.
Weiss noted that she also looked for sales increases as well
as profit margins that are under control.
Since Weiss looked for earnings increases 58% of the
time, we specified four increases out of the last seven
years. The screen also requires that trailing earnings per
share over the last 12 months be greater than or equal to
earnings per share for the last fiscal year.
Record of Uninterrupted Dividends
Weiss required blue-chip companies to have a mini-
mum of 20 to 25 years of uninterrupted cash dividends to
help ensure that companies used for relative yield analy-
sis have a high resistance to cutting dividends. Our screen
looks for stocks that have paid a dividend for each of the
last seven years and that have not decreased their dividend
in the last seven years.
Minimum Liquidity
It is important to be able to have a sufficient number
of outstanding shares to help ensure that investors can
purchase and sell shares at appropriate times. Share prices
can react more severely to buying or selling
pressure if only a limited number of shares
are outstanding. Therefore, sufficient
Yield liquidity helps to guard against manipu-
lation of share price. Weiss specified that
$100,000
the initial universe of stocks should have
at least five million outstanding shares,
which we incorporated into our screen.

Weiss Blue Chip Dividend

Yield Screen Institutional Sponsorship
$10,000 Weiss pointed out that almost all
the trading volume in the stock market
involves institutional investors. Institu-
tional investors consist of mutual funds,
hedge funds, banks, insurance compa-
S&P 500 $1,000 nies, pensions and retirement funds, and
by necessity they tend to gravitate toward
high-quality companies. It is therefore
important that a company have sufficient
interest from the powerful institutional
$100 market to prevent the stock price from
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Average Annual Price Gain (%) Risk

Price Gain (%) Since 1 3 5 10 Price Gain (%) Index
YTD 2021 2020 2019 2018 2017 1998 Yr Yr Yr Yr Bull* Bear* (X)
Weiss Blue Chip Div Yield** (4.2) 9.5 3.1 25.4 (3.6) 15.2 9.4 (10.1) 10.8 8.4 8.2 49.8 (6.8) 1.28
S&P 500 (13.3) 26.9 16.3 28.9 (6.2) 19.4 5.9 (1.7) 14.5 11.4 12.2 84.4 (13.3) 1.00
*Bull market period is April 1, 2020, through December 31, 2021. Bear market period is January 1, 2022, through April 30, 2022.
**Price performance for hypothetical portfolio rescreened and rebalanced monthly using month-end prices and no transaction costs.
Source: AAII Stock Investor Pro/Refinitiv. Data as of 5/31/2022.

8 AAII JOURNAL J U LY 2 0 2 2

What It Takes: Weiss Blue Chip Dividend Yield Criteria
» Those companies in the real estate operations industry are
not included
» Dividends have been paid for the last seven fiscal years
» Over the last seven fiscal years dividends have been in-
creased at least three times and have never been decreased
» The average number of shares outstanding for the last fiscal
quarter (Q1) is greater than or equal to five million
» At least 80 institutions own stock in the company
» Earnings per share have increased at least four times over
the last seven fiscal years
» Earnings per share for the last 12 months are greater than or
equal to earnings per share for the last fiscal year
» The current dividend yield is within 10% of the seven-year
languishing. Weiss’ recommendation, which we follow, is
to require at least 80 institutional shareholders.
Yield Comparison
From her universe of blue-chip stocks, Weiss applied an
analysis of relative dividend yield levels to company his-
torical norms to determine levels of undervaluation and
overvaluation. Weiss observed that companies repeatedly
fluctuate between levels of high and low values. For exam-
ple, one stock may typically top out when its yield drops
to 2% and rebound strongly when its yield increases to
5%. While a stock may continue to increase in price once
its yield drops below 2%, the potential benefit of owner-
ship is not equal to the risk of decline. Its price can only be
TABLE 1
Weiss Blue Chip Dividend Yield Portfolio
Characteristics
Weiss
Blue Chip
Portfolio Characteristics (Median) Div Yield
Price-earnings ratio (X) 12.8
Price-to-book-value ratio (X) 2.25
Price-to-sales ratio (X) 1.39
Yield (%) 1.5
Price-earnings to EPS 5 yr. est growth rate (PEG) (X) 1.95
EPS dil. cont. 5 yr. growth rate (X) 20.1
EPS estimated growth rate (%) 7.0
Market cap. ($ million) 3,039
52-wk relative strength vs. S&P 500 (%) (4.6) (17.3)
Monthly Observations
Monthly turnover (%) 13.1
Source: AAII Stock Investor Pro/Refinitiv. Data as of 6/10/2022.
AAII.COM/JOURNAL
average high dividend yield
» The seven-year average high dividend yield is the average of
the ratios of the dividend in a given year to the high price for
the same year for each of the last seven fiscal years
» The current ratio for the latest quarter (Q1) is greater than
or equal to 2.0
» For companies not in the utility sector, the long-term debt-
to-equity ratio for the latest quarter (Q1) is less than or
equal to 50%
» For companies not in the utility sector, the payout ratio for
the last 12 months is less than or equal to 50%
» For companies in the utility sector, the payout ratio for the
latest 12 months is less than or equal to 85%
supported by increasing its dividend, which has the effect
of increasing its dividend yield, assuming that the price
stays constant.
Weiss’ rule of thumb notes that stocks tend to be under-
valued or overvalued when they are within the 10% range
of their historical levels of high or low dividend yield aver-
age. When a stock’s dividend
yield is at or above its histori-
When a stock’s dividend
cal average high, it’s time to
yield is at or above its
buy. When a stock’s dividend historical average high,
yield is equal to or below its it’s time to buy.
historical average low, it’s
time to sell.
The Weiss screen looks for stocks trading at current
yields that are within 10% of their seven-year aver-
age high dividend yield. The comparison of cur-
rent yield to the firm’s own past record of dividend
yields allows firms with low absolute dividend
yields to pass the screen. It is best to study the pat-
tern of movement between high and low dividend
Exchange-
Listed yield over a number of cycles. Stock Investor Pro
Stocks is currently limited to a comparison over the last
17.3 seven fiscal years.
1.51
2.23 Additional Financial Security
0.0 A high relative current yield by itself does not
1.40
indicate that a stock is undervalued. It may indi-
12.4
cate that the dividend is in jeopardy. For a high
12.6
relative yield to be considered a sign of an under-
681
valued stock, the company must be expected to
continue to pay and expand the dividend over
time. While the blue-chip screen helps to reveal
strong firms, Weiss also relied on many traditional
ratios as indications of the safety of the dividend
and the attractiveness of the yield.
AAII JOURNAL J U LY 2 0 2 2 9
AAII.COM/JOURNAL

TABLE 2
Stocks Passing the Weiss Blue Chip Dividend Yield Screen (Ranked by Dividend Yield)
Closing Div EPS EPS Current Payout
Price Growth Div Growth Growth Ratio Ratio
(6/10) 7yr Yield Est 7yr Q1 12m
Company Ticker ($) (%) (%) (%) (%) (X) (%) Industry
Snap-on Incorporated SNA 209.36 15.6 2.7 4.6 11.2 3.2 33.7 Industrial Machinery & Equip
Mueller Industries, Inc. MLI 54.93 8.2 1.8 — 24.4 2.7 6.4 Industrial Machinery & Equip
SEI Investments Co. SEIC 54.99 7.7 1.5 — 10.7 5.2 17.0 Investment Mgmt & Fund Opers
Marten Transport, Ltd. MRTN 17.38 21.9 1.4 — 16.3 2.0 15.7 Freight & Logistics - Ground
Werner Enterprises, Inc. WERN 39.32 11.6 1.3 9.4 15.9 2.3 11.6 Freight & Logistics - Ground
Source: AAII Stock Investor Pro, Refinitiv and I/B/E/S. Data as of 6/10/2022.

» Current Ratio: Weiss used the current ratio as a
measure of cash liquidity. Determined by dividing
current assets by current liabilities, current ratios
above 2.0 are generally considered desirable. We
screen for a current ratio of 2.0 or greater.
» Debt to Equity: Weiss also suggested using the
debt-to-equity ratio, which compares long-term debt
to equity. Companies with high levels of debt can
run into financial problems more quickly during an
economic slowdown, putting the dividend or even
solvency into jeopardy. Weiss liked to see a debt-to-
equity ratio of no more than 50% but excluded this
test for utilities because of their unique regulatory
status. For non-utility stocks, a debt-to-equity ratio
less than 50% is required.
» Payout Ratio: The payout ratio is a common mea-
sure of dividend safety. It is calculated by dividing
dividends by earnings. Generally, the lower the pay-
out ratio, the more secure the dividend. Weiss con-
sidered any ratio above 50% as a warning sign. How-
ever, for some industries, such as utilities, levels as
high as 85% are considered normal. For our screen,
if a company is not in the utility sector, the payout
ratio for the last 12 months must be less than or equal
to 50%. Utility sector firms may have a payout ratio
for the latest 12 months less than or equal to 85%.
Real estate investment trusts (REITs) were excluded.
Stocks Passing the Screen
The stocks passing the Weiss screen tend to have a
lower price-earnings ratio than the typical exchange-listed
stocks, as seen in Table 1. As expected, the yield is higher
than the norm. It is interesting that the stocks passing the
screen have higher historical earnings growth, but a lower
forward consensus earnings growth rate than the typical
exchange-listed company. The stocks passing the filter
have a median market capitalization (share price times
shares outstanding) of just over $3 billion. The typical
exchange-listed company is trading with a market cap of
$681 million. While the stocks currently passing the screen
have underperformed the S&P 500 by 4.6% over the last
52 weeks, the typical exchange-listed stock has underper-
formed the S&P 500 by 17.3% over the same period.
Turnover with the Weiss screen tends to be lower than
most screening approaches followed by AAII, but at times
the number of passing companies can be low. From 1998
through 2019, about 11 companies typically passed the
Weiss screen. Lately the number of passing companies has
been even lower.
The five companies that met the Weiss Blue Chip Divi-
dend Yield screen criteria as of June 10, 2022, are listed in
Table 2 ranked by dividend yield.
Conclusion
Weiss maintained that all stocks go through cycles of
undervaluation and overvaluation. She felt that investors
could take advantage of these cycles—buying stocks when
they are undervalued and subsequently selling them when
they are overvalued—by comparing current dividend
yields to historical norms for blue-chip companies.
In Weiss’ view, dividends offer the best indication of
both quality and value, while providing a steady source of
return. The Weiss screen just touches upon the primary
aspects of applying a dividend yield approach to investing.
It doesn’t represent a buy list. Any investment approach
requires careful study and analysis of individual compa-
nies prior to making a decision. ▪
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Visit AAII.com/journal to comment on this article.
MORE AT AAII.COM/JOURNAL
High-Yielding Dividend Payers by Derek J. Hageman,
June 2022
Differentiating Between High Yield and High Dividend
Growth Strategies by Derek J. Hageman, October 2021
Dividend Growth Helps Portfolios Combat Inflation by
Aaron Brask, Ph.D., July 2020

10 AAII JOURNAL J U LY 2 0 2 2

I N D U S T RY F O C U S
Cybersecurity Stocks &
ETFs Offer Exposure to
a High-Growth Industry
Cybersecurity companies have experienced
rapid growth in revenues, but be prepared to
“pay up” in valuation.
BY SEAN MURPHY
In this new, periodic AAII column, we are going to
cover key metrics to look at by analyzing stocks and
exchange-traded funds (ETFs) in different industries. For
this first article, we focus on the high-growth cybersecu-
rity industry.
The global cybersecurity industry is currently valued
at around $185 billion. The industry is projected to reach
$500 billion by 2030, registering a compound annual
growth rate (CAGR) of 12.0% from 2022 to 2030.
Cybersecurity can be described as the collective meth-
ods, technologies and processes to help protect the confi-
dentiality, integrity and availability of computer systems,
networks and data against unauthorized access and dam-
age by attackers. The main purpose of cybersecurity is to
protect all organizational assets from both external and
internal threats as well as from disruptions caused by nat-
ural disasters. Given the rapidly evolving landscape and
the ever-increasing adoption of security software across
various sectors—including finance, government, military,
retail, hospitals, education and energy to name a few—
more and more sensitive information is becoming digitized
and accessible through wireless and wired digital commu-
nication networks and across the omnipresent internet.
Cybersecurity is one of the greatest challenges facing
public and private enterprises. Recent incidents such as
the SolarWinds and Microsoft Exchange hacks led Presi-
dent Biden to sign a cybersecurity-related executive order
to modernize the nation’s computer defenses and protect
Sean Murphy is a finance intern at AAII.
Find out more at www.aaii.com/authors/
sean-murphy.
AAII.COM/JOURNAL
federal government networks.
Although many, but not all, cybersecurity companies
are still unprofitable, they have experienced rapid growth
in revenues. This is expected to continue as cybersecurity
is becoming an increasingly important aspect of busi-
nesses and governments.
Key Cybersecurity Stock Fundamentals
When evaluating cybersecurity companies as invest-
ments, the main areas of focus are growth, earnings per
share (EPS) revisions, value and quality. Each of these
areas can be evaluated using a series of metrics. Growth
is arguably the most important area of focus when evalu-
ating cybersecurity stocks.
Some common metrics used
to evaluate growth include, Growth is arguably the
but are not limited to, quar- most important area of
focus when evaluating
terly year-over-year operating
cybersecurity stocks.
cash flow growth, five-year
operating cash flow growth
rate and quarterly year-over-year sales growth.
Although earnings are often used to assess growth,
the AAII Stock Evaluator breaks earnings revisions into
its own category. Earnings strength is commonly evalu-
ated by tracking previous earnings surprises and positive
or negative revisions to estimated earnings.
Despite rising revenues over the past year, it is still
important to take the valuations of cybersecurity
stocks into account. Useful ratios include the five-year
estimated price-earnings-to-earnings-growth (PEG) ratio
and the price-earnings (P/E) ratio. When assessing the
quality of a stock, return on assets (ROA) and return on
invested capital (ROIC) are commonly used. The return
on assets indicates how profitable a company is in rela-
tion to its total assets. The higher the return on assets, the
more efficient and productive a company is at managing
its balance sheet to generate profits.
How Did We Select Cybersecurity Stocks
to Analyze?
The stocks we evaluated for this column are Fortinet
Inc. (FTNT), A10 Networks Inc. (ATEN) and Qualys Inc.
(QLYS). We selected these companies first by looking
at the top 20 common holdings across the three largest
cybersecurity ETFs—Global X Cybersecurity (BUG), First
Trust Nasdaq Cybersecurity (CIBR) and ETFMG Prime
Cyber Security (HACK)—as determined by their assets
under management (AUM). From there, we used a com-
posite score of the stocks’ individual A+ Investor Value,
Growth, Estimate Revisions and Quality Scores.
AAII JOURNAL J U LY 2 0 2 2 11
AAII.COM/JOURNAL
Fortinet Inc. (FTNT)
Fortinet is a cybersecurity vendor that sells products,
support and services to small and midsize businesses,
enterprises and government entities. Its products include
unified threat management appliances, firewalls, net-
work security and its security platform, Security Fabric.
Services revenue is primarily from FortiGuard security
subscriptions and FortiCare technical support. At the end
of 2021, products were 38% of revenue and services were
62% of sales. The California-based company realizes rev-
enue across the globe.
Fortinet is a strong growth stock, as indicated by its
A+ Investor Growth Grade of B. The company has a strong
five-year operating cash flow growth rate of 34.1%. This
is more than five times higher than the sector median
of 6.2%. Fortinet’s quarterly operating cash flow growth
year over year is strong as well at 25.4%. Quarterly sales
growth year over year is more than double the sector
median at 34.4%. Overall, Fortinet significantly out-
performs the industry average when analyzing growth
metrics.
Fortinet reported a positive earnings surprise for
FIGURE 1
Fortinet Inc. Financial Summary
Source: QuoteMedia. Data as of 6/11/2022.
12 AAII JOURNAL J U LY 2 0 2 2
first-quarter 2022 of 18.2%, and in the prior quarter
reported a positive earnings surprise of 7.2%. Over the
last month, the consensus earnings estimate for the sec-
ond quarter of 2022 has decreased from $1.109 to $1.085
per share due to five upward and 18 downward revisions.
Over the last three months, the consensus earnings esti-
mate for full-year 2022 has remained the same at $5.107
per share.
The stock has a Value Grade of F, although almost all
of the 20 cybersecurity stocks considered had a grade of
D or F for value. Fortinet has a PEG ratio of 0.9, which is
below the industry median of 1.3. When considering the
price-earnings ratio, the stock again appears to be expen-
sive at 75.3.
The company performs strongly in terms of its return
on assets and return on invested capital. Fortinet has a
return on assets of 11.0% and a return on invested capi-
tal of 26.5%. The industry average return on assets and
return on invested capital are –2.8% and 19.6%, respec-
tively. The stock’s Quality Grade is A.
Figure 1 provides a summary of key fundamental char-
acteristics for Fortinet. It is from AAII’s Stock Evaluator,
 AAII.COM/JOURNAL

TABLE 1
The Largest Cybersecurity ETFs
Index Fund

Total Port Avg

Annual Return (%) Risk Exp Turn- Total Dly
Total Return (%) 3-Year 5-Year 10-Year Index Ratio over Assets Trad
Ticker ETF Name 2022 2021 2020 2019 2018 ETF Grade ETF Grade ETF Grade (x) Yield (%) (%) ($ Mil) Vol
BUG Global X Cybersecurity ETF (17.1) 13.7 71.2 — — — — — — — — — 0.3 0.50 — 1,156 441
CIBR First Trust NASDAQ Cybersecurity ETF (19.1) 19.6 50.4 28.2 1.9 17.3 C 15.1 C — — 1.57 0.8 0.60 — 5,323 1,213
HACK ETFMG Prime Cyber Security ETF (22.2) 7.2 40.8 23.2 7.1 8.6 D 10.1 D — — 1.48 0.4 0.60 34 1,677 244

Source: Morningstar. Data as of 5/31/2022.

which can be accessed by all AAII members. Simply type
a stock ticker into the search box located near the top of
most pages on AAII.com.
A10 Networks Inc. (ATEN)
A10 Networks provides secure application solutions
and services that give intelligently connected companies
the ability to continuously improve cyber protection and
digital responsiveness across dynamic information tech-
nology and network infrastructures. Its portfolio consists
of six secure application solutions. Key revenue is gener-
ated from the Americas, with the rest coming from Europe,
the Middle East and Africa, plus the Asia Pacific region.
A10 Networks is also a strong growth stock, with an
A+ Investor Growth Grade of B. Quarterly sales growth is
about average at 14.4%. The company has a strong five-
year operating cash flow growth rate of 21.7%, well above
the sector median. A10 Networks’ quarterly year-over-
year growth in operating cash flow is incredibly strong
at 599.9%.
A10 Networks reported a positive earnings surprise
for first-quarter 2022 of 23.8%; in the prior quarter, it
reported a positive earnings surprise of 15.6%. Over the
last month, the consensus earnings estimate for the sec-
ond quarter of 2022 has remained the same at $0.159 per
share despite two upward revisions. Over the last three
months, the consensus earnings estimate for full-year
2022 has increased from $0.678 to $0.683 per share, based
on two upward revisions.
The stock has a Value Grade of D, which is considered
expensive. A10 Networks has a PEG ratio of 0.3, which is
well below the industry median. The relatively low price-
earnings ratio of 11.8 could indicate value; however, the
price-to-book ratio of 5.88 is nearly double the industry
median. The company has a very strong return on assets
of 27.7% and a return on invested capital that is about
average at 21.5%.
small and medium-sized businesses. The firm’s solutions
are delivered through its cloud platform and provide
security intelligence by automating the life cycle of infor-
mation technology (IT) asset discovery, security assess-
ment and compliance management. Its solutions enable
customers to collect and analyze large amounts of IT secu-
rity data. The company’s cloud platform discovers and
prioritizes vulnerabilities and recommends actions. The
company derives revenue from subscriptions to its cloud-
based solutions, typically on an annual basis. A large
majority of the firm’s revenue is generated in the U.S.
Qualys continues the trend of strong growth stocks
with an A+ Investor Growth Grade of B. The company
has a strong five-year operating cash flow growth rate
of 23.7%, nearly four times the industry median. Qualys’
quarterly operating cash flow growth is strong as well
at 36.6% year over year. Quarterly sales growth is about
average at 17.1%. While still a strong growth stock,
Qualys doesn’t appear quite as robust as Fortinet or A10
Networks.
Qualys reported a positive earnings surprise for first-
quarter 2022 of 11.7%. In the prior quarter, it reported a
positive earnings surprise of 5.5%. Over the last month,
the consensus earnings estimate for the second quarter
of 2022 has increased from $0.711 per share to $0.793 per
share based on 12 upward revisions. Over the last three
months, the consensus earnings estimate for full-year
2022 has remained the same at $3.149 despite 11 upward
revisions.
Qualys is an ultra-expensive value stock with an A+
Investor Value Grade of F. The stock’s PEG ratio is 1.8 and is
above the industry median. Qualys’ price-earnings ratio
is nearly twice the industry median at 52.0. The company
performs strongly in terms of its return on assets (12.3%)
and return on invested capital (35.6%). Overall, Qualys
has a very strong Quality Grade of A.

Qualys Inc. (QLYS) Cybersecurity ETFs

Qualys is a provider of cloud-based security and com- ETFs are an option for investors who want exposure
pliance solutions to enterprises, government entities and to cybersecurity stocks but are looking to diversify their

AAII JOURNAL J U LY 2 0 2 2 13
AAII.COM/JOURNAL
holdings instead of investing in one or two stocks. ETFs
also don’t have rear-end loads or other restrictions on
selling like some sector- and industry-based mutual
funds can have.
When looking at ETFs, there are a number of met-
rics to pay attention to. Size as measured by AUM is one,
because if an ETF fails to attract enough interest, it may
be shuttered. Expense ratios for industry-specific ETFs
are often higher than they are for broad market funds
but they should never be excessively high. The ETFs high-
lighted here—Global X Cybersecurity, First Trust Nasdaq
Cybersecurity and ETFMG Prime Cyber Security—were
selected based on their AUM (Table 1).
Global X Cybersecurity ETF (BUG)
Global X Cybersecurity was launched in 2019. The ETF
seeks to provide investment results that correspond gen-
erally to the price and yield performance, before fees and
expenses, of the Indxx Cybersecurity index. The fund
invests at least 80% of its total assets in the securities
of the underlying index, which can include American
depositary receipts (ADRs)—stocks of foreign compa-
nies that trade on U.S. exchanges—and global depositary
receipts (GDRs)—stocks of foreign companies that trade
primarily on European exchanges. The underlying index
is designed to provide exposure to exchange-listed com-
panies that are positioned to benefit from the increased
adoption of cybersecurity technology. The fund is
non-diversified.
Global X Cybersecurity has total assets of $1.16 billion,
making it the smallest ETF in the top three, but still siz-
able. It has an expense ratio of 0.50% which is below the
category average of 0.56%. Being a relatively new ETF, it
lacks a return track record for three years or longer. In
its first full year, 2020, the ETF realized a 71.2% return,
and the return in 2021 was 13.7%. But thus far in 2022, it is
posting a negative return.
First Trust Nasdaq Cybersecurity ETF (CIBR)
First Trust Nasdaq Cybersecurity was launched in
2015. The fund tracks the Nasdaq CTA Cybersecurity
index. The index includes securities of companies classi-
fied as cybersecurity companies by the Consumer Tech-
nology Association (CTA). The ETF is non-diversified.
First Trust Nasdaq Cybersecurity is the largest cyber-
security ETF we evaluated with AUM of $5.32 billion.
The expense ratio of 0.60% is slightly higher than the
category average but still low enough to warrant an A+
Investor Grade of C. It has realized a three-year annual-
ized return of 17.3% and a five-year annualized return of
15.1%. This translates to an A+ Investor grade of C for both
periods. The fund’s total returns were positive each year
14 AAII JOURNAL J U LY 2 0 2 2
from 2018 through 2021, with 2020 being the high point
at 50.4%. Through May 2022, it has had a total return of
–19.1% for 2022.
ETFMG Prime Cyber Security ETF (HACK)
ETFMG Prime Cyber Security was launched in 2014.
The fund’s primary benchmark is the Prime Cyber Defense
NR USD index. This index tracks the performance of the
exchange-listed stocks of companies across the globe
that engage in providing cyber defense applications or
services as a vital component of their overall business or
provide hardware or software for cyber defense activities
as a vital component of their overall business. The fund
invests at least 80% of its total assets in the component
securities of the index and in ADRs and GDRs based on
the component securities in the index.
ETFMG Prime Cyber Security is the oldest of the three
ETFs and has AUM of $1.68 billion. The expense ratio is
the same as First Trust Nasdaq Cybersecurity at 0.60%.
ETFMG Prime Cyber Security realized a three-year
annualized return of 8.6% and a five-year annualized
return of 10.1%. These returns were ranked in the second-
lowest quintile for the technology category, hence the A+
Investor grade of D for both periods. ETFMG Prime Cyber
Security, like the two other ETFs, does not have a 10-year
grade. Total returns each year followed a similar trend to
that of First Trust Nasdaq Cybersecurity, peaking in 2020
with a return of 40.8%. Thus far in 2022, it has a total
return of –22.2%.
Conclusion
The cybersecurity industry is growing rapidly and is
expected to nearly triple in size by 2030. In the new digital
age, it is becoming an ever-important aspect of both busi-
ness and government. Investors desiring such companies
have options, with a variety of cybersecurity stocks and
ETFs to choose from. In doing so, investors should realize
that they may have to “pay up” for growth through higher
valuations in cybersecurity stocks and accept shorter
return histories for cybersecurity ETFs. ▪
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Visit AAII.com/journal to comment on this article.
MORE AT AAII.COM/JOURNAL
Valuation Ratios: The PEG Ratio by Joe Lan, CFA, June
2014
Consider Earnings Estimate Surprises and Revisions
by John Bajkowski, March 2020
The Individual Investor’s Guide to the Top ETFs 2022
by AAII Staff, February 2022
 AAII.COM/JOURNAL

AAII Community
Never Navigate Uncertain Markets Alone

If you’re like me, you’re probably exhausted from

hearing the phrase, “we’re living through unprecedented
times,” which this year applies to pretty much every-
thing. Rising inflation, international turbulence, unex-
pected shortages, skyrocketing gas prices—just looking
at your portfolio may cause you pain.
To keep up with the ebb and flow of the markets, inves-
tors are looking for outside perspectives. What is the right
mix of investments in the current environment? And
how should you be reacting to sudden market changes?
AAII members are discussing this very topic in the
Allocation Strategies Community. Barry J. asked the
robust online community, “What changes, if any, are you
making to your asset allocations to realign your invest-
ments with your goals? How do you address the ‘known
knowns’ and ‘known unknowns’?”
And in just a few minutes, Barry J. had countless mem- off others and get motivated to build a strong portfolio.
bers providing their unique perspective on how they’ve Join hundreds of AAII members within the Allocation
been navigating the market and adjusting their alloca- Strategies Community and start connecting today.
tion. Kendrick M. shared his allocation of “85% to short- If you’re looking for other investment topics, we have
term inflation-protected Treasury bond ETFs.” Christo- groups devoted to retirement withdrawals, stock screen-
pher V. is “moving out of longer-duration bond funds into ing, sustainable investing, mutual funds and ETFs,
floating rate funds.” income investing—plus, our newest group on options
The AAII Community is investing strategies. Visit https://community.aaii.com
The AAII Community is a
a vibrant, active “collective to learn more and find a community that fits your indi-
vibrant, active “collective
investor brain” where you can vidual needs. ▪
investor brain.”
bounce ideas and strategies —Jenna Brashear, AAII Community manager

Field Notes From the Chapters NOW OPEN

Remember Mr. Rogers? “It’s a great day in the neigh-

borhood!” That’s the feeling at AAII Chapters. The pan-
demic triggered an explosion in Zoom webinars, and
Zoom triggered an explosion of connecting in new ways.
Meetings that could serve 50 people in a church basement
started welcoming 200 listeners online. Special interest
group (SIG) sessions that struggled to achieve critical
mass now host dozens of enthusiasts online. Great speak-
ers and great ideas are getting greater exposure. We now
have the opportunity to rethink what chapters and SIGs
can accomplish.
We are opening new SIG communities on specialized
topics moderated by chapter members. Options Investing
Strategies was recently launched, with others to follow.
Go to the AAII Community (https://community.aaii.com)
to join the groups that spark your interest. ▪
—Hollis Wagenstein-Hurturk, AAII Chapter liaison

A A I I J O U R N A L J U LY 2 0 2 2 15
AAII.COM/JOURNAL

F I RST C U T: STO C K S The Stocks First Cut is designed as a starting point, showing the top stocks that pass relatively
simple screens of interest to individual investors.

Benjamin Graham’s Defensive Investor Non-Utility Screen

Benjamin Graham defined defensive investors as those
unable to devote much time to the process or those who
are unfamiliar or inexperienced with investing. As such,
Graham felt defensive investors should confine their hold-
ings to the shares of “important” companies. Such com-
panies have long histories of profitability, are in a strong
financial condition and hold a leading position in their
respective industry, ranking at least in the top third in size
among their industry group.
Based on the principles outlined in his book “The
Intelligent Investor,” AAII developed the Graham
Defensive Non-Utility screen. The screen, along with the
similar Graham Defensive Utility screen, is pre-built into
AAII’s Stock Investor Pro fundamental stock screening and
research database program.
The non-utility, or industrial, screen aims to find stocks
with low intrinsic value, focusing on companies of ade-
quate size (based on annual sales) with strong balance
sheets; earnings stability; strong, uninterrupted dividend
records; and moderate price-earnings and price-to-book
ratios.
The Graham Defensive Investor Non-Utility screen
requires a history of positive earnings and dividends for
each of the last seven years. Graham also wanted to see
defensive companies grow their earnings. Therefore, aver-
age annual growth in earnings per share of at least 3% over
the last seven years is required. The screen restricts stocks
to a maximum price-earnings ratio of 25 and specifies that
the product of a company’s price-earnings ratio and price-
to-book-value ratio cannot be higher than 38.
In addition, companies must have sales of at least $400
million over the last 12 months and a current ratio for the
last fiscal quarter greater than or equal to 2.0. The long-
term debt-to-working-capital ratio for the last fiscal quar-
ter of passing companies must be greater than 0% and less
than 100%. Finally, utility companies are excluded. ▪
—Matt Markowski, AAII assistant financial analyst

Graham Defensive Investor Non-Utility

(Ranked by Price-Earnings Ratio Ascending)
P/E EPS
P/E Avg EPS Sales Current Growth
Ra o 3-Yr 12-Mo Ra o 7-Yr
Company Ticker (X) (X) ($ Mil) (X) (%) Industry
Encore Wire Corp. WIRE 3.4 10.1 2,872 6.2 46.9 Electrical Components & Equip
Winnebago Industries, Inc. WGO 4.4 9.8 4,317 2.2 26.3 Recrea onal Products
Mueller Industries, Inc. MLI 5.1 12.1 3,961 2.7 24.4 Industrial Machinery & Equip
Shoe Carnival, Inc. SCVL 5.2 10.2 1,320 2.4 36.1 Retailers - Apparel & Accessories
Evercore Inc. EVR 5.3 8.7 3,367 3.3 33.7 Investment Bank & Broker Servs
AMCON Distribu ng Co. DIT 5.8 11.5 1,704 2.9 20.2 Tobacco
Intel Corpora on INTC 6.2 7.7 77,704 2.1 10.8 Semiconductors
Reliance Steel & Aluminum Co. RS 6.4 13.2 15,741 4.0 24.6 Metals & Mining - Iron & Steel
Insteel Industries Inc. IIIN 6.6 22.7 724 3.8 20.9 Metals & Mining - Iron & Steel
Janus Henderson Group PLC JHG 7.3 10.4 2,751 3.2 6.1 Investment Mgmt & Fund Opers
Preformed Line Products Co. PLPC 7.4 10.3 538 2.6 17.2 Electrical Components & Equip
Sturm Ruger & Company Inc. RGR 7.5 12.0 713 5.1 23.8 Recrea onal Products
Resources Connec on, Inc. RGP 8.4 20.1 760 2.4 6.3 Business Support Services
MKS Instruments, Inc. MKSI 9.8 16.0 2,998 5.2 24.3 Industrial Machinery & Equip
SKF AB (ADR) SKFRY 10.0 13.1 8,333 2.1 6.9 Industrial Machinery & Equip
Source: AAII Stock Investor Pro. Data as of 6/16/2022.

This screen is available to members in the Screening section at AAII.com.

Screen performance and the list of passing companies are updated monthly.

16 AAII JOURNAL J U LY 2 0 2 2
 AAII.COM/JOURNAL

The First Cut is designed as a starting point, showing the top investments that pass relatively simple screens of interest to
F I R S T C U T : S Tindividual
O C K S investors. The Stocks First Cut is designed as a starting point, showing the top stocks that pass relatively
simple screens of interest to individual investors.

Benjamin Graham’s Defensive Investor Utility Screen

Benjamin Graham’s approach focused on finding the
intrinsic value of a stock. He believed investors should buy
stocks whose prices are close to their intrinsic value, and
preferably those that are priced lower than their intrinsic
value.
The AAII Graham Defensive Investor Utility screen
focuses on companies within the utilities sector. The
screen requires a history of positive earnings and divi-
dends for each of the last seven years. Earnings per share
are required to have average annual growth of at least 3%
over the last seven years. These requirements are the same
as the AAII Graham Defensive Investor Non-Utility screen.
The utility screen differs from the non-utility screen
by requiring companies to have total assets for the last
fiscal quarter greater than or equal to $200 million and a
long-term debt-to-equity ratio for the last quarter less than
200%. This reinforces Graham’s idea that defensive inves-
tors should only be looking for “important” companies
with long histories of profitable operations that are in a
strong financial condition.
On the valuation side, the product of a company’s
price-earnings ratio and price-to-book-value ratio cannot
be higher than 38. We arrive at this value by multiplying
the maximum price-to-book ratio of 1.5 by the maximum
price-earnings ratio of 25. As a proxy for the maximum
price-earnings ratio, Graham used the inverse of 10-year
AA corporate bond rates. He felt that defensive investors
should establish a portfolio whose earnings yield—the
inverse of the price-earnings ratio—was at least compa-
rable to the yield on 10-year AA bonds.
Current long-term high-grade corporate bond yields
differ from those prevailing when Graham set his price-
earnings objective, and therefore the cutoff needs to be
adjusted. When bond yields increase, Graham’s formula
requires a lower price-earnings ratio. Conversely, lower
bond yields mean that an investor could accept a higher
price-earnings cutoff, which makes more stocks available
for consideration. ▪
—Matt Markowski, AAII assistant financial analyst

Graham Defensive Investor Utility

(Ranked by Price-Earnings Ratio Ascending)
P/E EPS
P/E Avg EPS Sales Total Growth
Rao 3-Yr 12-Mo Assets Q1 7-Yr
Company Ticker (X) (X) ($ Mil) ($ Mil) (%) Industry
UGI Corp. UGI 5.5 10.7 9,073 17,777 20.1 Ulies - Natural Gas
Companhia de Saneamento Bsc DE SBS 10.0 12.6 3,895 10,704 14.3 Ulies - Water & Related
Oer Tail Corporaon OTTR 12.1 21.6 1,310 2,792 15.2 Ulies - Electric
Pinnacle West Capital Corp. PNW 13.6 15.3 3,891 22,201 6.2 Ulies - Electric
Union Electric Co. UELMO 15.7 17.8 3,467 18,920 4.1 Ulies - Electric
Hawaiian Electric Industries HE 16.8 19.1 2,993 15,908 4.6 Ulies - Electric
American Electric Power Co. AEP 17.1 20.3 17,104 89,831 5.8 Ulies - Electric
Evergy Inc. EVRG 17.2 19.5 5,199 28,740 6.9 Ulies - Electric
Fors Inc. FTS 17.5 15.1 9,744 58,202 9.3 Ulies - Electric
Spire Inc. SR 17.7 21.7 2,054 9,401 11.3 Ulies - Natural Gas
Atmos Energy Corp. ATO 19.6 21.8 3,837 21,271 8.1 Ulies - Natural Gas
PNM Resources Inc. PNM 19.7 24.7 1,859 8,728 6.6 Ulies - Electric
Algonquin Power & Ulies Co. AQN 20.0 10.7 3,076 22,777 4.1 Ulies - Mulline
IDACORP Inc. IDA 20.1 20.8 1,486 7,285 3.3 Ulies - Electric
ONE Gas Inc. OGS 20.1 21.2 2,155 8,468 9.1 Ulies - Natural Gas
Source: AAII Stock Investor Pro. Data as of 6/16/2022.

This screen is available to members in the Screening section at AAII.com.

Screen performance and the list of passing companies are updated monthly.

AAII JOURNAL J U LY 2 0 2 2 17
AAII How-To
How to Analyze Earnings Surprises
Stock prices are dictated by expectations, and prices
fluctuate as these expectations are affirmed or are proven
to be unfounded. The most frequently followed measure
of market expectations combines analyst projections for a
company’s earnings into a consensus earnings estimate.
When a company reports actual earnings that differ
from the consensus estimate, the difference is regarded
as unexpected earnings. More commonly it is called an
earnings surprise. During the earnings reporting season,
which for most companies follows the end of their fiscal
quarters in March, June, September and December, finan-
cial outlets provide daily reports on earnings announce-
ments. Firms with significant earnings surprises are often
highlighted in the media.
A positive earnings surprise occurs when actual
announced earnings are above the consensus estimate.
Negative earnings surprises take place when announced
earnings are below the earnings expectations. Stocks of
firms with significant positive earnings surprises tend to
show above-average price performance subsequently,
while those of firms with negative surprises tend to experi-
ence below-average price performance.
How Do You Judge an Earnings Surprise?
To say that a company missed or exceeded its consen-
sus estimate for the quarter does not necessarily capture
the true significance of such an event. There are several
ways of measuring the significance of unexpected earn-
ings. One of them is the percentage surprise. It is calcu-
lated by subtracting the consensus estimate by the actual
earnings and dividing the difference by the consensus
estimate.
For example, food producer Sanderson Farms
Inc. (SAFM) reported second-quarter 2022 earnings
per share (EPS) of $14.39 on May 27, 2022. This
exceeded the consensus estimate for the period of
$6.81 per share. The $7.58 per share positive earn-
ings surprise represents a 111.3% surprise.
The formula is:
= (Actual EPS – EPS estimate) ÷ EPS estimate
= ($14.39 – $6.81) ÷ $6.81
= 1.113, or 111.3%
What Is the Standardized Unexpected
Earnings (SUE) Score?
Another method of measuring the magnitude or
significance of earnings surprises is with the stan-
dardized unexpected earnings (SUE) score. SUE
18 AAII JOURNAL J U LY 2 0 2 2
measures the earnings surprise in terms of its number of
standard deviations above or below the consensus earn-
ings estimate.
An earnings surprise is considered more significant
the farther it is outside the statistical range of estimates
expected at the time of the announcement. Assuming a
normal distribution of earnings estimates, 68.3% of actual
earnings will be within one standard deviation of the con-
sensus estimate, 95.4% will be within two standard devia-
tions, and 99.7% will be within three standard deviations.
The absolute value of SUE measures the degree of
unexpected earnings. When the SUE score equals zero,
there is no earnings surprise; the actual earnings per
share is in line with the consensus earnings estimate.
How to Calculate Standardized
Unexpected Earnings
The SUE score is calculated by subtracting the esti-
mated earnings per share from the actual earnings per
share and dividing the difference by the standard devia-
tion of the actual earnings from the consensus estimate.
Note that SUE scores are absolute values, mean-
ing that they will never be negative. Studies indicate that
stocks with higher SUE scores tend to exhibit stronger
price reactions to earnings surprises than those with low
SUE scores.
Another food producer, Simply Good Foods Co. (SMPL),
reported quarterly earnings per share of $0.360 on April
6, 2022, for its fiscal quarter ending on February 28. The
consensus estimate was $0.274 per share. The standard
deviation of the estimates determining the consensus
FIGURE 1
Earnings Data on Stock Evaluator Chart
estimate was $0.030. Therefore, FIGURE 3
the calculation is as follows: A+ Custom Stock Screener
SUE Score
= (Actual EPS – EPS estimate)
÷ standard deviation
= ($0.36 – $0.274) ÷ $0.030
= 2.9
Where to Find Earnings
Surprises
AAII members can see earn-
ings figures for a company’s most
recent quarter on the Charts tab
of the Stock Evaluator. Enter a
stock ticker in the search tool
at the top of any AAII.com page
and select the company from the
list. Click on Charts, then select Earnings from the Events
option and you’ll see a circled E added to the chart on
the date of the earnings announcement. Hover over the
circled E to bring up the earnings surprise details. Figure
1 shows the May 27 earnings data for Sanderson Farms.
AAII members also have access to five earnings estimate
revision screens, which often identify stocks with earnings
surprises, at the Screening section of AAII.com.
subscribers have access to the Grades
tab, which includes an Estimate Revisions Grade. The
grade is based on a score that takes into account the SUE
score for the last two reported fiscal quarters as well as
the change in the consensus estimate for the current fiscal
year over the last month and three months. Figure 2 shows
the SUE scores and percent revisions for Simply Good
Foods and their resulting scores. The composite score of
72 puts Simply Good Foods in the B, or positive, grade
range for estimate revisions. The Earnings tab of Stock
Evaluator presents more in-depth data on actual earnings
and consensus estimates over time for A+ Investors.
To screen on earnings revisions, subscrib-
ers can use the Custom Stock Screener. Filters include
earnings surprise for the latest quarter, SUE for the latest
FIGURE 2
A+ Investor Scores
quarterly earnings and estimate revision percentages for
the current quarter and current year. Figure 3 shows sam-
ple results.
How Long Does the Impact of an
Earnings Surprise Last?
Changes in a stock’s price resulting from a positive or
negative earnings surprise can be felt immediately, but the
surprise can also have a long-term effect. While it may be
difficult for individuals to buy on the initial surprise event,
studies indicate that the surprise effect can persist for as
long as a year after the announcement.
Therefore, it may not be prudent to buy a stock that
has declined following a negative earnings surprise think-
ing it is now “attractively priced.” There is a good chance
that the stock will continue to underperform the market for
some time. Alternatively, it may not be too late to buy a
stock that has seen its price jump following a positive earn-
ings surprise.
Not surprisingly, the stock prices of larger firms tend to
adjust to surprises faster than those of small firms. This is
because the larger firms are tracked by more analysts and
portfolio managers, who can buy and sell
on news quickly.
Firms with an earnings surprise one
quarter, either positive or negative, tend
to have additional surprises in subse-
quent quarters. When a surprise signals
a change in company fundamentals,
management and analysts alike are typi-
cally slow to realize the strength and per-
sistence of the change. As a result, com-
pany guidance and analyst estimates do
not immediately reflect this change in
fundamentals. ▪
—John Bajkowski, AAII president
AAII JOURNAL J U LY 2 0 2 2 19
AAII.COM/JOURNAL

M U T UA L F U N D S & E T F S Go to the Investor Guides area at www.aaii.com/guides for the most

current data on all mutual funds and ETFs tracked.

approaching retirement or a separate goal for which they

The Benefits and Risks of Short-Term
Bond Funds
Income-seeking investors have had the opportunity
this year to capture high yields through bonds, including
short-term bonds. Yields on one-year Treasuries were at
2.88% in mid-June 2022 versus 0.40% at the start of the
year. Three-year Treasury notes yielded 3.33% in mid-June
versus 1.04% in January. These yields are at their highest
level in over a decade, as are yields on many other bonds.
This rise in yields is occurring as the Federal Reserve is
in the midst of hiking rates to rein in inflation.
In addition to providing a source of income, bonds—
including bond funds—have traditionally been a counter-
part to stocks for investors looking to diversify their port-
folios with a less volatile asset that also provides income.
Investors often adjust their asset allocation strat-
egy to move portfolio dollars from equities to bonds as
their investment horizon decreases, whether they are
were preserving capital.
Mutual funds and exchange-traded funds (ETFs) remove
some of the difficulty of selecting and maintaining an
investment portfolio, which applies to bond funds as it
applies to stock funds. Bond funds are useful if you don’t
want to buy and manage individual bonds yourself or you
lack the ability to easily buy a diversified set of bonds.
With yields up from their historic lows, it’s a good time
to learn how bonds can make up a portion of your asset
allocation through either mutual funds or ETFs and how to
select bond funds to fulfill your allocation targets.
Choosing a Bond Fund Over a Bond
The obvious yet critical difference between owning
bonds directly or indirectly through either a mutual fund
or ETF is management.
Bonds have a defined maturity date at which the inves-
tor receives the principal the bond was issued for (typically

TABLE 1
Taxable Bond Fund Category Averages
3-Yr 5-Yr 10-Yr Total
1-Mo 1-Yr Ann’l Ann’l Ann’l Risk Exp Avg Avg Avg Avg Avg
Ret Ret Ret Ret Ret Index Ratio Yield Bond Duration Maturity Coupon
(%) (%) (%) (%) (%) (X) (%) (%) Quality (Yrs) (Yrs) (%)
General Maturity Categories
Ultrashort Bond 0.0 (1.0) 0.7 1.1 0.9 0.12 0.53 0.6 A 0.79 2.27 1.9
Short-Term Bond 0.2 (4.0) 0.7 1.2 1.3 0.21 0.69 1.4 BBB 2.27 2.91 2.6
Intermediate Core Bond 0.4 (8.5) 0.0 1.1 1.7 0.31 0.62 1.8 A 6.31 8.64 2.8
Intermediate Core-Plus Bond 0.1 (8.3) 0.5 1.4 2.2 0.36 0.76 2.3 BBB 6.19 8.56 3.1
Long-Term Bond 0.2 (13.8) 0.4 2.1 3.4 0.76 0.61 3.8 A 12.84 20.64 4.1
Government Categories
Short Government 0.4 (3.9) 0.0 0.6 0.5 0.12 0.71 1.2 AA 2.06 3.31 2.0
Intermediate Government 0.6 (7.2) (0.4) 0.5 0.9 0.23 0.71 1.4 AAA 5.39 7.27 2.5
Long Government (2.4) (14.4) (2.5) 0.7 1.4 0.97 0.36 2.4 AAA 18.15 21.71 2.5
Miscellaneous Taxable Categories
Bank Loan (2.5) (1.4) 1.6 2.2 3.1 0.54 1.05 3.5 B 0.44 4.67 4.3
Corporate Bond 0.4 (9.9) 0.8 1.8 2.9 0.54 0.73 2.6 BBB 7.39 10.54 3.6
High-Yield Bond (0.3) (5.1) 2.7 2.9 4.6 0.60 0.96 4.8 B 3.66 5.46 5.6
Inflation-Protected Bond (0.7) (0.7) 4.2 3.3 1.6 0.31 0.61 5.3 AA 6.34 7.75 0.9
Multisector Bond (0.5) (6.0) 1.5 2.1 3.4 0.52 1.00 3.5 BB 3.83 6.82 4.1
Nontraditional Bond (0.4) (4.1) 1.0 1.5 2.4 0.41 1.27 2.9 BB 2.60 5.86 4.0
Emerging Markets Bond (0.2) (14.1) (1.6) (0.1) 2.1 0.81 1.02 5.0 BB 5.75 10.02 5.3
Emerging-Mkts Local-Currency Bond 1.7 (11.8) (2.1) (1.3) (0.4) 0.82 1.15 4.6 BB 4.46 5.60 5.5
World Bond 0.2 (11.9) (1.6) (0.3) 0.6 0.47 0.90 2.5 BBB 5.88 7.84 3.0
World Bond-USD Hedged (0.6) (8.4) (0.2) 1.1 2.0 0.35 0.76 1.9 A 6.55 7.36 2.5
Source: AAII/Morningstar. Data as of 5/31/2022.

20 AAII JOURNAL J U LY 2 0 2 2
 AAII.COM/JOURNAL

TABLE 2
Short-Term Bond Mutual Funds by Category (Ranked by 5-Year Return)

1-Yr 1-Yr 3-Yr 3-Yr 5-Yr 5-Yr Total Exp Div Avg Total

Closed
Ann’lizd Ret Cat Ann’lizd Ret Cat Ann’lizd Ret Cat Risk Ratio Yield Duration Assets Credit
Fund Ticker Ret (%) Grade Ret (%) Grade Ret (%) Grade Index (%) (%) (Yrs) ($ Mil) Quality Index Tracked
Short-Term Bond (4.1) 0.7 1.2 0.21 0.69 1.4 2.79 A
Frost Credit Investor FCFAX (4.2) C 2.5 A 3.1 A 0.48 0.96 4.0 2.89 176 BB Bloomberg US Credit TR USD
BlackRock Allocation TgtShrs Ser A BATAX (3.4) B 1.2 A 2.7 A 0.47 0.02 2.5 — 2,571 — Bloomberg US Universal TR USD
Diamond Hill Short Dur Sec Bd Inv DHEAX (2.5) A 1.5 A 2.3 A 0.39 0.83 2.3 1.48 1,377 BB Bloomberg US Govt/Credit 1-3 Yr TR USD
Payden Strategic Income Investor PYSGX (4.8) D 1.8 A 2.3 A 0.41 0.65 2.9 2.81 176 BB Bloomberg US Agg Bond TR USD
Channel Short Duration Income CPSIX (5.4) F 1.9 A 2.0 A 0.22 0.96 2.0 — 31 — Bloomberg US Govt/Credit 1-5 Yr TR USD
American Century Short Dur Strt Inc ASDVX (3.6) B 1.7 A 1.9 A 0.23 0.53 2.5 1.62 785 BB Bloomberg US Govt/Credit 1-3 Yr TR USD
Frost Total Return Bond Investor FATRX (2.3) A 1.2 A 1.9 A 0.32 0.71 3.4 3.54 2,813 BBB Bloomberg US Agg Bond TR USD
USAA Short-Term Bond USSBX (2.5) A 1.7 A 1.9 A 0.22 0.54 2.0 1.79 2,749 BBB Bloomberg Credit 1-3 Yr TR USD
Thompson Bond THOPX (2.6) A 1.0 B 1.8 A 0.42 0.71 3.5 2.12 2,101 BB Bloomberg US Govt/Credit 1-5 Yr TR USD
FPA New Income FPNIX (2.1) A 0.9 B 1.7 A 0.13 0.45 1.2 1.31 10,649 BBB X Bloomberg US Agg Bond TR USD
Vanguard Shrt-Trm CorpBd Idx Adm VSCSX (5.0) F 1.0 B 1.7 A 0.24 0.07 1.6 2.77 47,933 A Bloomberg USD Corp Bd 1-5 Yr TR USD
Azzad Wise Capital WISEX (2.4) A 1.7 B 1.7 A 0.19 0.89 1.4 — 214 — ICE BofA 1-3Y US Corp&Govt TR USD
American Century Short Duration Inv ACSNX (2.8) A 1.2 B 1.5 B 0.14 0.60 1.5 1.55 1,566 BBB Bloomberg US Govt/Credit 1-3 Yr TR USD
Thrivent Limited Maturity Bond S THLIX (3.5) B 0.9 B 1.5 B 0.20 0.41 1.6 2.00 1,453 BB Bloomberg US Govt/Credit 1-3 Yr TR USD
Vanguard Short-Term Inv-Grade Adm VFSUX (4.9) F 0.9 B 1.5 B 0.21 0.10 1.7 2.77 71,154 BBB Bloomberg Credit 1-5 Yr TR USD
Goldman Sachs Short Dur Bond Inv GSSRX (4.4) D 1.1 B 1.4 B 0.24 0.49 1.4 2.18 2,136 BBB Bloomberg USD Corp & Gvt 1-5 Yr TR
T. Rowe Price Short-Term Bond PRWBX (3.6) B 1.0 B 1.4 B 0.17 0.40 1.2 1.91 5,246 A Bloomberg US Govt/Credit 1-3 Yr TR USD
Weitz Short Duration Inc Investor WSHNX (2.4) A 1.2 A 1.4 B 0.17 0.55 1.6 1.60 782 A Bloomberg US Aggregate 1-3 Yr TR USD
Payden Low Duration Fund PYSBX (3.2) A 0.8 C 1.3 C 0.17 0.43 1.0 1.41 1,410 — ICE BofA 1-3Y US Trsy TR USD
Russell Inv Short Duration Bond M RSDTX (4.8) D 0.7 C 1.3 C 0.15 0.50 0.9 1.99 445 BBB ICE BofA 1-3Y US Trsy TR USD
Northern Short Bond BSBAX (3.8) C 0.7 C 1.2 C 0.14 0.40 1.2 1.92 408 BBB Bloomberg US Govt/Credit 1-3 Yr TR USD
Baird Short-Term Bond Investor BSBSX (3.7) B 0.7 C 1.2 C 0.14 0.55 0.8 1.92 10,351 A Bloomberg US Govt/Credit 1-3 Yr TR USD
DoubleLine Low Duration Bond N DLSNX (2.7) A 0.5 D 1.2 C 0.23 0.68 1.4 1.14 6,855 BB ICE BofA 1-3Y US Trsy TR USD
Homestead Short-Term Bond HOSBX (5.1) F 0.5 D 1.2 C 0.14 0.79 0.7 — 511 — ICE BofA 1-5Y US Corp&Govt TR USD
BNY Mellon Intermediate Bond M MPIBX (5.3) F 0.6 C 1.2 C 0.18 0.56 2.3 2.88 649 A Bloomberg US Govt/Credit Interm TR
Vanguard Shrt-Term Bond Index Adm VBIRX (4.6) D 0.6 C 1.2 C 0.13 0.07 1.1 2.68 70,568 AA Bloomberg US 1-5Y GovCredit FlAdj TR
Brown Advisory Intermediate Inc Inv BIAIX (6.5) F 0.2 F 1.1 D 0.28 0.53 1.3 — 145 — Bloomberg US Agg Interm TR USD
Fidelity Short-Term Bond FSHBX (3.4) B 0.7 C 1.1 C 0.13 0.45 0.8 1.70 2,874 BBB Bloomberg US Govt/Credit 1-3 Yr TR USD
Janus Henderson Short Dur Flex Bd D JNSTX (4.8) D 0.6 C 1.1 C 0.19 0.53 1.3 2.74 1,064 BB X Bloomberg US Govt/Credit 1-3 Yr TR USD
Metropolitan West Low Dur Bd M MWLDX (3.7) B 0.5 D 1.1 D 0.14 0.62 1.0 1.96 2,469 BBB ICE BofA 1-3Y US Trsy TR USD
Short Government (4.2) 0.0 0.6 0.12 0.71 1.2 2.55 AAA
Sit US Government Securities SNGVX (2.7) A 0.7 A 1.3 A 0.10 0.81 1.1 1.20 423 AAA Bloomberg US Govt Interm TR USD
Vanguard Short-Term Federal Adm VSGDX (3.7) B 0.9 A 1.3 A 0.12 0.10 0.7 2.03 7,318 AAA Bloomberg Government 1-5 Yr TR USD
Vanguard Short-Term Treasury Adm VFIRX (3.4) B 0.7 A 1.1 A 0.11 0.10 0.7 1.93 7,149 AA Bloomberg Treasury 1-5 Yr TR USD
Trust For Credit Unions Short Dur TCU TCUDX (4.1) C 0.4 B 1.0 A 0.11 0.22 0.5 — 631 — ICE BofA Current 2-Y US Trsy TR USD
American Century Shrt-Trm Gvt Inv TWUSX (3.0) A 0.6 B 0.9 B 0.09 0.55 0.5 1.61 244 AA Bloomberg US Govt 1-3 Yr TR USD
Vanguard Shrt-Trm Treas Idx Adm VSBSX (3.2) A 0.5 B 0.9 B 0.10 0.07 0.4 1.91 18,107 AAA Bloomberg 1-3 Yr US Treasury TR USD
Homestead Short-Term Government HOSGX (4.3) C 0.3 B 0.8 B 0.12 0.75 0.5 — 73 — ICE BofA 1-5Y US Trsy TR USD
Payden US Government PYUSX (4.9) D 0.4 B 0.8 B 0.12 0.43 2.5 2.62 25 AAA ICE BofA 1-5Y US Trsy TR USD
State Farm Interim SFITX (4.5) C 0.1 C 0.8 B 0.15 0.16 0.9 — 386 — Bloomberg 1-5 Yr Treasury TR USD
Goldman Sachs Short Dur Govt Inv GTDTX (4.2) C 0.2 C 0.7 C 0.10 0.57 0.6 1.94 634 AA ICE BofA Current 2-Y US Trsy TR USD
Fidelity Limited Term Government FFXSX (4.7) D 0.0 C 0.6 C 0.14 0.45 0.5 2.73 322 AA Bloomberg Government 1-5 Yr TR USD
BNY Mellon Short U.S. Govt Secs M MPSUX (3.1) A 0.3 B 0.6 C 0.09 0.50 1.9 1.65 153 AA Bloomberg US Govt 1-3 Yr TR USD
Northern Limited Term U.S. Govt NSIUX (4.9) D 0.0 C 0.5 C 0.14 0.42 0.5 2.68 51 AAA Bloomberg Government 1-5 Yr TR USD
BNY Mellon Short U.S. Govt Secs Inv MISTX (3.4) B 0.0 C 0.4 D 0.09 0.75 1.6 1.65 153 AA Bloomberg US Govt 1-3 Yr TR USD
City National Rochdale Govt Bond N CGBAX (5.2) F (0.4) D 0.1 F 0.14 1.67 0.5 — 22 AAA Bloomberg Government 1-5 Yr TR USD
Source: AAII/Morningstar. Data as of 5/31/2022.

AAII JOURNAL J U LY 2 0 2 2 21
AAII.COM/JOURNAL

$1,000 in the U.S.). Along the way to

maturity, the investor receives regu- FIGURE 1
lar interest payments as additional Comparison of Current Bond Mutual Fund Yields by
compensation for lending the prin- Category
cipal to the bond issuer. 4.0%
If you own bonds directly, you
3.5%
would receive all of the interest
payments and the principal upon 3.0%
maturity unless you sell the bond
early. You control the rate of return 2.5%
because it is known from purchase, 2.0%
outside of changes in price based on
the market. 1.5%
A traditional bond fund or ETF
1.0%
has no maturity date and is thus an
ever-changing stream of assets as 0.5%
the manager buys and sells bonds to
0.0%
maintain the fund’s objectives. Ultrashort Short-Term Intermediate-Term Long-Term
As an investor in a bond fund, you Corporate Government
do not control the rate of return; the
fund manager decides what is held, Source: Morningstar. Data as of 5/31/2022.
what is removed and what is added
to the fund’s portfolio. These deci-
sions can have tax implications if the FIGURE 2
changes result in capital gains being Comparison of Current Bond ETF Yields by Category
realized and you don’t hold the fund 4.0%
shares in a tax-exempt account. In
this case, you would have to sell your 3.5%
shares in the mutual fund or ETF to 3.0%
receive your “principal” (adjusted for
any capital appreciation or loss). 2.5%

2.0%
Short-Term Bond Fund
Category Descriptions 1.5%
Short-term bonds are present in 1.0%
two of AAII’s three asset allocation
models, the moderate investor and 0.5%
the conservative investor. The model
0.0%
for an aggressive investor asset allo- Ultrashort Short-Term Intermediate-Term Long-Term
cation features only intermediate
Corporate Government
bond representation.
Because our data comes from Source: Morningstar. Data as of 5/31/2022.
Morningstar, the short-term bonds
in this article are based on
Morningstar’s category definitions, which conform to three-and-a-half years relative to the three-year average of
general time-based term standards based on duration. the Morningstar Core Bond index.
Overall, there are three taxable bond categories that use The short-term government bond fund category fol-
“short” in their name. Two are the primary short-term lows the same duration logic but requires that at least 90%
bond categories: short-term bonds and short-term govern- of the fund’s bond holdings are in bonds backed by the U.S.
ment bonds, called short government. government or by a government-linked agency.
The short-term bond fund category includes funds with Short-term bonds are less sensitive to interest rates than
a major focus on corporate and investment-grade U.S. those with longer durations, reducing their risk because
fixed-income issues that typically have durations of one to investor dollars are committed for a shorter period of time.

22 AAII JOURNAL J U LY 2 0 2 2
 AAII.COM/JOURNAL

TABLE 3
Short-Term Bond ETFs by Category (Ranked by 5-Year Return)

1-Yr 1-Yr 3-Yr 3-Yr 5-Yr 5-Yr Total Exp Div Avg Total
Ann’lizd Ret Cat Ann’lizd Ret Cat Ann’lizd Ret Cat Risk Ratio Yield Duration Assets Credit

Index
ETF Ticker Ret (%) Grade Ret (%) Grade Ret (%) Grade Index (%) (%) (Yrs) ($ Mil) Quality Index Tracked
Short-Term Bond (4.1) 0.7 1.2 0.21 0.69 1.4 2.79 A
iShares 1-5 Yr Invmt Grd Corp Bd ETF IGSB (5.1) D 1.1 B 1.7 A 0.24 0.06 1.60 2.75 21,501 A X ICE BofA 1-5Y US Corp TR USD
Vanguard Short-Term Corp Bd ETF VCSH (5.0) C 1.0 C 1.7 A 0.24 0.04 1.60 2.77 40,986 A X Bloomberg USD Corp Bd 1-5 Yr TR USD
iShares 0-5 Yr Inv Grade Corp Bd ETF SLQD (4.1) B 1.1 B 1.7 A 0.19 0.06 1.50 2.35 2,416 A X Markit iBoxx USD Liquid IG 0-5 TR USD
SPDR Portfolio Shrt Term Corp Bd ETF SPSB (3.0) A 1.2 B 1.6 B 0.16 0.04 1.00 1.90 7,702 A X Bloomberg US Corp 1-3 Yr TR USD
PIMCO Enhanced Low Dur Active ETF LDUR (3.5) A 1.1 B 1.5 B 0.17 0.49 1.10 1.81 1,400 A ICE BofA 1-3Y US Trsy TR USD
Fidelity Limited Term Bond ETF FLTB (5.2) D 0.7 C 1.3 C 0.22 0.36 1.00 2.57 249 BBB Bloomberg US Govt/Credit 1-5 Yr TR USD
Nuveen EY 1-5 Year US Aggt Bd ETF NUSA (5.2) D 0.7 C 1.3 D 0.17 0.20 2.20 2.84 35 A X ICE BofA EnhanYield 1-5 US Brd TR USD
iShares Core 1-5 Year USD Bond ETF ISTB (5.0) C 0.7 D 1.3 C 0.15 0.06 1.60 2.79 5,607 BBB X Bloomberg US Universal 1-5 Years TR USD
WisdomTree US Shrt-Term Corp Bd SFIG (5.0) C 0.7 D 1.3 B 0.21 0.18 1.30 2.60 39 BBB X WisdomTree US Short-term Corp Bd TR USD
AdvisorShares Newfleet Mult-Sect ETF MINC (4.0) B 0.6 D 1.3 D 0.24 0.76 1.50 1.97 92 BBB Bloomberg US Agg Bond TR USD
WisdomTree Yield Enh US ST Agg ETF SHAG (5.1) D 0.5 F 1.2 D 0.18 0.12 0.90 3.08 115 AA X Bloomberg US Short Agg Enhn Yd TR USD
Vanguard Short-Term Bond ETF BSV (4.6) B 0.6 D 1.2 F 0.13 0.04 1.10 2.68 40,030 AA X Bloomberg US 1-5Y GovCredit FlAdj TR USD
iShares Interm Govt/Crdt Bd ETF GVI (6.3) F 0.4 F 1.1 F 0.20 0.20 1.50 4.05 2,489 AA X Bloomberg US Govt/Credit Interm TR USD
SPDR DoubleLine ShrtDur Ttl RetTac STOT (3.8) B 0.3 F 0.9 F 0.15 0.45 1.50 1.29 135 BB Bloomberg US Aggregate 1-3 Yr TR USD
Invesco Invest Grade Defensive ETF IIGD (6.2) F 0.9 C — — 0.24 0.13 1.10 3.47 63 A X Invesco Investment Grade Defensive USD
Overlay Shares Short Term Bond ETF OVT (6.1) F — — — — — 0.79 3.30 2.77 61 A
Western Asset Short Duration Inc ETF WINC (5.9) F 1.5 A — — 0.55 0.29 1.80 2.75 28 BBB Bloomberg USD Corp Bd 1-5 Yr TR USD
Aptus Defined Risk ETF DRSK (5.8) F 4.5 A — — 0.41 0.79 2.70 4.14 881 BBB Bloomberg US Agg Bond TR USD
iShares ESG 1-5 Year USD Corp Bd ETF SUSB (5.1) D 0.9 C — — 0.23 0.12 1.20 2.72 961 A X Bloomberg MSCI US Corp 1-5 Yr ESG TR USD
Schwab 1-5 Year Corporate Bond ETF SCHJ (5.0) C — — — — — 0.04 1.10 2.79 376 A X Bloomberg USD Corp Bd 1-5 Yr TR USD
Avantis Short-Term Fixed Income ETF AVSF (4.8) C — — — — — 0.15 0.70 2.68 78 A
JPMorgan BetaBldrs 1-5 Yr US Agg ETF BBSA (4.8) C 0.5 F — — 0.13 0.05 1.20 2.77 38 AA X Bloomberg Short-Term US Aggreg TR USD
JPMorgan Short Dur Core Plus ETF JSCP (4.4) B — — — — — 0.33 1.50 — 192 —
First Trust Low Dur Strat Foc ETF LDSF (4.0) B 0.2 F — — 0.21 0.77 2.10 2.01 272 BB Bloomberg US Govt/Credit 1-5 Yr TR USD
Hartford Short Duration ETF HSRT (3.7) A 1.2 A — — 0.27 0.29 2.10 1.83 85 BB Bloomberg US Govt/Credit 1-3 Yr TR USD
Natixis Loomis Sayles Shrt Dur Inc ETF LSST (3.2) A 1.6 A — — 0.17 0.38 0.90 1.88 40 A Bloomberg US Govt/Credit 1-3 Yr TR USD
VictoryShares USAA Core ST Bd ETF USTB (2.6) A 1.7 A — — 0.20 0.35 1.70 1.89 362 BBB Bloomberg Credit 1-3 Yr TR USD
Dimensional Short-Dur Fix Inc ETF DFSD — — — — — — — 0.18 — 2.85 1,041 A ICE BofA 1-5Y US Corp&Govt USD
Columbia Short Duration Bond ETF SBND — — — — — — — 0.25 — 3.10 50 BBB X Beta Advantage Short-Term Bond USD
Short Government (4.2) 0.0 0.6 0.12 0.71 1.2 2.55 AAA
iShares Agency Bond ETF AGZ (5.4) F 0.5 D 1.3 A 0.19 0.20 0.80 3.82 642 AAA X Bloomberg US Agency TR USD
Schwab Short-Term US Treasury ETF SCHO (3.1) B 0.5 B 1.0 C 0.10 0.04 0.40 1.93 8,796 AAA X Bloomberg US Treasury 1-3 Yr TR USD
Vanguard Short-Term Treasury ETF VGSH (3.1) D 0.5 C 1.0 B 0.10 0.04 0.40 1.91 14,887 AAA X Bloomberg 1-3 Yr US Treasury TR USD
First Trust Low Duration Oppos ETF LMBS (2.7) A 0.3 F 1.0 A 0.11 0.66 2.00 1.60 5,443 AA ICE BofA 1-5Y US Trsy&Agcy TR USD
iShares 1-3 Year Treasury Bond ETF SHY (3.1) C 0.4 F 0.9 F 0.10 0.15 0.30 1.89 24,904 AAA X ICE U.S. Treasury 1-3 Year Bond TR USD
SPDR Portfolio Short Term TreasETF SPTS (3.1) F 0.5 A 0.9 F 0.10 0.06 0.30 1.92 3,570 AAA X Bloomberg 1-3 Yr US Treasury TR USD
Franklin Liberty Short Dur US Govt ETF FTSD (2.8) A 0.5 A 0.9 D 0.07 0.25 0.80 1.22 326 AAA Bloomberg US Govt 1-3 Yr TR USD
Source: AAII/Morningstar. Data as of 5/31/2022.

U.S.-government-backed bonds minimize credit risk fur-
ther, making those bonds both safer in terms of default
and with less exposure to ever-changing credit spreads.
These relationships can be seen in Table 1, which com-
pares the taxable bond categories in AAII’s dataset. Short-
term categories have better one-year returns than the
intermediate- and long-term categories.
Short-term bonds can act as a buffer against volatility,
preserving capital, and as such can be buckets to dip into
when you want to buy riskier assets at a discount during
down markets.
However, the short-term bond fund categories have
lower yields (as shown in Figures 1 and 2, which plot cat-
egory average yields for different bond fund and ETF cate-
gories) and less opportunity for capital gains appreciation
than longer-term bond categories.

AAII JOURNAL J U LY 2 0 2 2 23
AAII.COM/JOURNAL
Bonds are typically sold with different times to matu-
rity, such as less than one year, one year, three years, five
years, 10 years, etc. Time to maturity simply refers to the
number of years the bondholder will receive interest pay-
ments from the bond’s coupon and, ultimately, the wait for
repayment of the principal.
Duration is a more precise measurement of a bond’s
time to maturity, accounting additionally for the sensitiv-
ity of the bond’s coupon rate to changes in interest rates.
Duration measures how long it takes in years for the bond-
holder to be repaid the bond’s price by the bond’s total cash
flows, which includes its interest payments as denoted by
its coupon.
This is important because interest rates and bond
prices are inversely related. When interest rates go up,
bond prices fall, and their yields rise. When interest rates
go down, bond prices rise, and their yields fall. Presently,
bond yields are rising as the Fed increases interest rates.
Ultrashort bond funds, the third taxable short bond
category, invest primarily in investment-grade U.S. fixed-
income issues and typically have durations of less than
one year. They offer minimal interest-rate sensitivity and
therefore low risk and total-return potential.
In general, the mutual funds with higher durations
have lower one-year category return grades, in both short-
term and short-government bond categories.
Evaluating Bond Funds
It is important to evaluate bond funds by their average
maturity, duration, credit quality and yield. When doing
so, compare a fund against its category peers.
When comparing bond funds of the same category, a
fund’s expense ratio is also important because it sets a per-
formance hurdle that management must regularly over-
come. Differences in expense ratios can also indicate either
a more active or passive approach to fund management.
In the list of short-term bond mutual funds in Table
2, Vanguard’s Short-Term Corporate Bond Index fund
(VSCSX) has one of the lowest expense ratios at 0.07%.
This compares to Frost Credit Investor’s (FCFAX) expense
ratio of 0.96%, which is one of the highest on the list.
The Vanguard fund’s expense ratio is below the short-
term bond category’s average of 0.69%, while the Frost
fund is above the category average.
In terms of expense ratios, ETFs are typically cheaper
than mutual funds, due to their tendency to be passive
index funds.
24 AAII JOURNAL J U LY 2 0 2 2
Limited Universe of Short-Term Bond Funds
The majority of mutual funds and ETFs are focused on
stock-based strategies. Investor options for bond ETFs are
limited, even more so for short-term categories compared
to categories with longer durations. The number of ETFs
that fall within the short-term bond and short government
categories is also much smaller than the number of mutual
funds in the same categories.
In total, 67 mutual funds passed the basic screening cri-
teria before we limited the group to those with the top five-
year returns. Two-thirds are in the short-term bond cat-
egory and one-third are in the short government category.
A total of 36 ETFs met basic screening requirements;
only seven of these are in the short government category.
Whereas many of the initially passing mutual funds are
not included here, the ETFs shown in Table 3 represent the
majority of the passing universe. The pickings are slim at
best, and many of the short-term bond ETFs are so new that
they do not have five-year return data.
Considering the role of active management in deter-
mining bond fund performance, it makes sense that there
would be a dearth of bond ETFs. Further considering that
most ETFs are passively managed, there is a proportion-
ately large number of ETFs in Table 3 that are not labeled
index funds.
Three of these such ETFs are near the bottom of the
short-term bond category in Table 3 because of their lack
of five-year return data: Hartford Short Duration ETF
(HSRT), Natixis Loomis Sayles Short Duration Income ETF
(LSST) and VictoryShares USAA Core Short-Term Bond
ETF (USTB). However, these three ETFs have top category
return grades for both three-year and one-year returns.
Conclusion
Bond funds help investors balance the risks of stock
funds in a diversified portfolio following an asset alloca-
tion model, especially as investors shift their portfolios
toward a more conservative allocation when approach-
ing goals such as retirement. Short-term bonds carry less
interest rate risk than longer-duration categories but
offer lower yields and less capital appreciation potential.
However, higher yields are making bonds more attractive
than in past years.
Funds offer an efficient way to access bonds for inves-
tors without the time or know-how to maintain individual
bond holdings, and the fund will continuously replenish
its holdings as its bonds mature. Compare a bond fund’s
expense ratio, maturity, duration, credit quality and cou-
pon against its competitors, in addition to considering
long-term returns. ▪
—Matthew Bajkowski, AAII finance writer
 AAII.COM/JOURNAL

P R I S M W E A LT H - B U I L D I N G P R O C E S S
FIGURE 1
PRISM Wealth-Building Process

Financial Planning Tips Step 1:

Prioritizing Your Goals
Revise as
Necessary

for Empty Nesters

Step 2:
A thorough review of your wealth-building Recognizing Your Risk
Tolerance and Allocation

plan is called for when children become

financially independent.
Step 3:
Identifying Your Investment
BY CHARLES ROTBLUT, CFA Management Preferences

Adjust
portfolio as
Having your children move out and become finan- Necessary
Step 4:
cially independent is a big life stage change for those who Selecting and Managing
Your Investments
become empty nesters (as well as for the young adults
themselves).
Apart from the emotions involved, there are finan-
cial and lifestyle aspects that will impact your wealth-
building and estate plans. Spending may change, goals Your Step 5: Your Progress
may evolve or be replaced with new ones and estate plans Allocation Monitoring and Life Stages

might need to be revisited. In this article, we address

those topics. Key considerations and decisions to be made
are discussed. Though we refer to parents, most of the
how much excess discretionary cash flow you now have.
guidance applies to both couples and single parents.
Doing this is more than just a budgeting exercise; it
Throughout this article, we reference the PRISM
helps you to identify how much money can be redirected
Wealth-Building Process (www.aaii.com/learnandplan).
toward existing goals, new goals you may have in mind
PRISM provides a framework for aligning your invest-
and potential lifestyle changes.
ment decisions with your financial goals. It is designed to
The budget review should also prompt you to revisit
evolve as your life does. Step M—Monitoring Your Allo-
the second step of the PRISM process: Recognizing Your
cation, Progress and Life Stages—directly ties into this
Risk Tolerance and Allocation. Larger amounts of cash
by asking if any life stage changes have occurred within
flow enable you to withstand more volatility in your port-
the past year. Figure 1 illustrates the process. (PRISM is
folio’s returns. The reason is that greater cash reduces the
among the many benefits all AAII members receive.)
amount that needs to be withdrawn from a portfolio.
Not every empty nester’s discretionary cash flow will
Review Your Budget increase. Some will find themselves needing to support
elderly parents or other relatives. Others will see spend-
In theory, parents should see an increase in their dis-
ing redirected, instead of reduced, because of lifestyle
cretionary spending upon becoming empty nesters. No
changes. Income may also drop due to lifestyle changes.
longer having to support (at least not fully) one or more
A reduction in cash flow reduces tolerance for risk.
dependents frees up cash in the budget.
Take a look at your current spending trends. Identify
Review Your Goals and Consider
Charles Rotblut, CFA, is a vice president at Potential Lifestyle Changes
AAII and editor of the AAII Journal. Find out Getting kids through college or other secondary edu-
more at www.aaii.com/authors/
charles-rotblut and follow him on Twitter
cation and into the workforce completes a key goal for
at twitter.com/CharlesRAAII. many parents. Once children are done with college, other
goals—in addition to retirement—can be focused on.

AAII JOURNAL J U LY 2 0 2 2 25
AAII.COM/JOURNAL
PRISM calls for goals to be revisited whenever a life
stage event occurs. Becoming an empty nester is one such
event. Since PRISM is an iterative process, those using it
would go back to the first step in the PRISM acronym, Pri-
oritizing Your Goals, and determine what has changed
and which goals should now be given top priority.
For many new empty nesters, two goals may come to
the forefront depending on wealth. One is paying any
debt, mortgage or otherwise. The second is boosting
retirement savings. Additional discretionary cash flow
created by no longer having to support children can be
used to accomplish one or both.
Consider Any New Goals
Other goals may come to the forefront. There may
be a desire to retire early or at least work less. (We’ll get
to those goals momentarily.) A second home may be a
consideration. Charitable initiatives may come to the
forefront.
Whatever the goals are, write them down. The Pri-
oritizing Your Goals worksheet helps you organize your
thoughts, including the timing and potential costs of
each goal.
If you’ve already completed the PRISM process, pull
out your PRISM plan and review your goals. Are they
still relevant? Are they prioritized correctly? Are there
new goals you wish to add? Are there changes to existing
goals you wish to make?
Check Your Progress Toward Funding
Retirement
As you review your goals, check your progress toward
funding retirement. The Monitoring Your Progress Work-
sheet—included in PRISM Step M, Monitoring Your Allo-
cation, Progress and Life Stages—can help you determine
whether you need to boost the amount you are setting
aside for retirement.
If you need to increase how
much you save, the tax code
can assist you. Annual catch- If you need to increase
up contributions to retire- how much you save, the
ment savings can be made by tax code can assist you.
those who are 50 or older. The
2022 limits allow for annual
catch-up contributions of $6,500 to be made to workplace
retirement plans such as 401(k), 403(b) and 457(b) plans.
An additional $1,000 contribution can be made to indi-
vidual retirement accounts (IRAs) or Roth IRAs. Catch-up
contributions to workplace retirement plans are subject
to periodic inflation adjustments, but IRA and Roth IRA
catch-up contributions are not.
26 AAII JOURNAL J U LY 2 0 2 2
Reassess Planned Lifestyle Changes
Whenever a life stage event occurs, the impact of life-
style changes should be included in the review and re-
assessment of goals. Becoming an empty nester brings
about several potential lifestyle changes that could alter
your wealth-building and financial planning decisions.
Stay or Move Upon Becoming an Empty Nester?
Are you planning to stay in your current house? Down-
size? Move? Buy a second house? All of these choices have
financial implications.
If you are staying in your house, are there anticipated
remodeling and/or repair expenses? For instance, will
you redo your kitchen? Will your roof need replacing
within the next few years? Such large expenses would
reduce cash flow and require savings to be tapped. The
impact of a major expenditure should be considered in
the context of your other financial goals, as it could alter
what you have available to fund those other goals.
Downsizing is perceived as increasing cash flow by
both lowering regular expenditures (housing costs,
utilities, etc.) and unlocking equity previously tied up
by the current home. This unlocked capital can be used
to make further progress toward existing goals or allow
you to set new financial goals. It may not always do so,
however, depending on the cost and location of your new
residence.
If a less expensive residence is chosen, the proceeds
will increase your tolerance for risk and potentially help
you fund certain goals. Married home sellers filing joint
returns can exclude the first $500,000 of capital gains
on the sale of a house, provided eligibility requirements
are met. The exclusion is $250,000 for single filers. These
capital gains are determined not only by the difference
between what you paid for the house and then sold it
for, but also by any adjustments to your cost basis. These
adjustments include both certain fees and closing costs
as well as many improvements made to your property.
More information can be found in IRS publication 523
(www.irs.gov).
State and local taxes are also a factor. If you move
to a higher tax locale, your aftertax cash flow could be
reduced. While several states give tax breaks to residents
of a certain age, newer empty nesters are often too young
to qualify for these breaks.
From the standpoint of your wealth-building plan, it
is helpful to consider how the change in housing impacts
your ability to meet your goals as well as your ability to
tolerate portfolio risk. You may also need to update your
will or other estate planning documents if your house is
listed in them.
 AAII.COM/JOURNAL

Work More or Less?

Among the questions the PRISM Monitor- FIGURE 2
ing Your Life Stages worksheet asks is whether
there has been a change in your or your spouse’s
PRISM Monitoring Your Life Stages Worksheet
employment (Figure 2). These changes include
This worksheet provides a valuable checklist of considerations to
a new job, the departure from an existing one
think through once you become an empty nester. It is included in
and/or a change in compensation. the PRISM Wealth-Building Process, which is a benefit available to
Some people choose to return to work or all AAII members at www.aaii.com/learnandplan.
switch from part-time to full-time work during
the empty-nester phase. Other empty nesters may
start to transition toward retirement by working
part-time or otherwise working fewer hours.
New full-time employment increases earn-
ings, obviously, but may also bring the oppor-
tunity to contribute to workplace retirement
plans and potentially health savings accounts
(HSAs). At age 50, catch-up contributions can be
made to 401(k) and similar types of retirement
savings accounts, as previously noted. For HSAs,
catch-up contributions of up to $1,000 can start
at age 55. Both increase the odds of successfully
funding retirement and being able to maintain a
comparatively more growth-oriented allocation
once in retirement.
Married individuals who return to work
should compare the investment offerings in
their new plan to their and their spouse’s target
allocation. The goal should be to maintain the
target allocation as defined in the Recognizing
Your Allocation worksheet from Step R of the
PRISM process.
If the desire is instead to phase into retire-
ment instead of returning to work or work-
ing more hours, then the first four steps of the
PRISM process will need to be revisited. Is reducing work option to return to full-time work. They may also not be
hours ahead of retirement a previously defined goal? If necessary if the salary from the reduced working hours
so, then make updated projections of what you think you is enough to cover living expenses or if there are other
will need to fund this goal and compare them against the sources of cash flow, such as a pension or an annuity.
projections you previously made. If they are close, look at Another option is to begin practicing retirement.
the Monitoring Your Progress worksheet from Step M to This would involve devoting vacation time to intended
see if your savings are where they should be. Combined, retirement activities. This could be accomplished while
these worksheets will help you determine your financial maintaining employment. Doing so has the advantage
ability to retire when desired. of allowing you to try out a desired lifestyle before fully
You will also want to revisit your allocation. Setting committing to it—timewise and financially. You could
aside a certain amount of money into buffer assets— spend your vacation time and even long weekends in a
assets whose value will not be affected by downward locale you are considering moving to or buying a second
moves in the financial markets—can allow you to avoid house in.
selling stocks during bear markets. AAII founder James
Cloonan recommended holding the equivalent of two to Any New Areas of Spending?
four years of living expenses in cash or similar so-called Another reason expenditures may not drop after
safe assets. Retirement expert Wade Pfau has suggested becoming an empty nester is the introduction of new
three years. activities. Travel is a good example.
Buffer assets may not be necessary if there is an Some AAII members participating in the PRISM

AAII JOURNAL J U LY 2 0 2 2 27
AAII.COM/JOURNAL
Academy have discussed travel
as being among their financial Another reason
goals. If you’ve already listed expenditures may not
travel as one of your goals, then drop after becoming
you may well have the dollars an empty nester is the
set aside to fund it. If not, con- introduction of new
sider how increasing travel will activities.
impact your ability to fund other
high-priority goals.
There may be other activities that you choose to
engage in once becoming an empty nester. Just as is the
case with travel, the key questions from a financial plan-
ning perspective are: Is the activity a previously stated
goal you have been saving for? Will its costs prevent you
from achieving other high-priority goals? Does it require
withdrawals from savings and, if so, how will they affect
your allocation and tolerance for risk?
The size of the expenditures relative to your cash flow
(e.g., discretionary income) and wealth matter here. An
activity with a large time component but proportionately
low cost is very different than one with a higher propor-
tionate cost.
There is no blanket guidance that applies to every
situation. Rather, it is a question of whether the expected
expenditure(s) are large enough to warrant a review of
your PRISM wealth-building plan.
Do a Thorough Estate Planning Review
If it has been several years since you’ve reviewed your
estate planning documents, beneficiary designations
and life insurance policies, a good time to do so is when
you become an empty nester. Consider how your life has
changed, how your children’s lives have changed and
how your needs have changed.
A good place to start is with the inventory of key estate
planning information on the PRISM Monitoring Your Life
Stages worksheet (not included in the screenshot in Fig-
ure 2). This section of the worksheet can serve as a useful
checklist of everything you need to look at.
Term life insurance policies
are a good place to start. Review If you previously
the coverage amounts. If you based how much life
previously based how much life insurance coverage
insurance coverage was needed was needed on the
on the desire to provide for desire to provide for
your entire family, revisit those your entire family,
amounts. This would also be the revisit those amounts.
case if your mortgage is paid off
or is close to being paid off.
In such instances, reducing or outright canceling the
policies may be a prudent choice. Converting a term pol-
icy to a whole life policy is an option for those seeking to
28 AAII JOURNAL J U LY 2 0 2 2
leave a sizable financial legacy to their heirs. (Costs rela-
tive to other options should be considered.) Alternatively,
you may wish to use the dollars being spent on premi-
ums to buy a long-term care policy, fund a health savings
account or boost retirement savings.
Next look at the beneficiary information on your
accounts. Is the information correct? Are there any
accounts you wish to list your children on as primary or
secondary beneficiaries that are not currently set up as
such? Are there trusts previously designated as benefi-
ciaries that are no longer needed? Also, consider whether
it makes sense to list one or more children as a trusted
contact on your financial accounts.
Then, look at your wills, trusts and other key docu-
ments such as medical powers of attorney. Has there been
a change in your family to account for: a marriage, grand-
children, etc.? Alternatively, do you wish to list one of
your adult children as an executor? Do you want to give
one or more of your children the ability to make medical
decisions on your behalf if necessary?
In making these changes, discuss your estate planning
wishes with your children. They should know, at a mini-
mum, where to find key estate planning documents and
the listing of your accounts and key contacts. (PRISM’s
inventory of key estate planning information is a helpful
document to share.) It is also wise to let your estate and
financial professionals know who your children are and
provide updated contact information for them.
Financial Planning Neither Starts Nor
Stops Upon Becoming an Empty Nester
Your PRISM wealth-building plan is designed to evolve
as your life changes. Becoming an empty nester is a big
life stage change and calls for a thorough review of your
wealth-building plan along with your financial planning
decisions. Going through this exercise will better prepare
you to enjoy the next phase of your life. ▪
MORE AT AAII.COM/JOURNAL
A Plan for Achieving the Financial Goal of Building
Retirement Savings by Charles Rotblut, CFA, January
2022
The Level3 Withdrawal Strategy to Maximize Your
Long-Term Wealth by John Bajkowski and James B.
Cloonan, Ph.D., November 2017
Planning Essentials for Modest Estates by John Horn,
J.D., and Dera Johnsen-Tracy, J.D., October 2019
MORE AT AAII.COM/WEBINARS
The PRISM Academy Webinar: Monitoring Your
Allocation, Progress and Life Stages presented by
Charles Rotblut, CFA, and Jenna Brashear, June 16, 2022

AAII MODEL PORTFOLIOS
Adhering to Shadow
Stock Portfolio Rules
Is Vital in Shaky Times
Small-cap returns have been greater than
that of large caps over the long term, but
there are often streaks of outperformance
followed by underperformance.
BY JOHN BAJKOWSKI
While the S&P 500 index squeaked out a 0.2% gain
during May, growing concerns over persistent inflation-
ary pressure and need for tightening monetary policy
weighed on investor sentiment, pushing the S&P 500
into a bear market during June. Figure 1 shows returns for
the Model Shadow Stock Portfolio compared to
benchmarks over longer periods of time.
Inflationary pressure has spread from a
relatively narrow segment of goods tied to
pandemic-related shortages to a wide array of
goods, food, housing, energy and even services.
Transitory inflation has turned persistent.
Consumer purchasing patterns are changing.
Supply constraints of goods and services con-
tinue. The war continues between Russia and
Ukraine with human, political and economic
impact. Even the coronavirus continues to
mutate and disrupt the world.
The Federal Reserve’s policy has reversed
from accommodating to tightening to rein in
inflation and the economy. The stock market is
forward-looking and one of the best predictors
of the direction of the economy. Investor appe-
tite for risk has decreased as concerns over the
possibility of a recession have increased while
also recognizing the headwinds that corporate
profits face. We see the collective impact with
weak stock market performance and bearish
investor sentiment.
It is important to remember that bear mar-
kets turn into bull markets, and normally the
strongest gains come early in the bull market.
It is best to follow a disciplined investment
approach and not let your emotions (fear or
AAII.COM/JOURNAL
John Bajkowski is the president of AAII.
Find out more at www.aaii.com/authors/
john-bajkowski.
greed) drive your actions.
As is often noted, less-liquid micro-capitalization
stocks typically go down more deeply during corrections,
only to bounce back more strongly in the subsequent
market upturn.
Generally, riskier and less-liquid assets are the
stronger-performing groups during a recovery. During
the financial crisis, the Model Shadow Stock Portfolio
lost more than the large-cap S&P 500 (down 63.4% versus
51.0%) but recovered to its previous high more quickly
(3.4 years versus 4.8 years). It is important to note that
past patterns do not always repeat, but it is helpful to
study historical patterns.
The Model Shadow Stock Portfolio has a 14.0% annu-
alized rate of return since inception, compared to 9.9%
for the Vanguard 500 Index fund (VFINX). The Model
Shadow Stock Portfolio’s return has come with more fre-
quent corrections and bear market periods.
FIGURE 1
Model Shadow Stock Portfolio Versus Benchmarks
(Through 5/31/2022)
Growth of $10,000 Portfolio
$1,000,000
Model Shadow Stock Portfolio
Vanguard 500 Idx (VFINX)
Vanguard Small Cap Idx (NAESX)
$100,000
$10,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Year-to- Annual Return (%) Ann’l
Date 1- 5- 20- Since Std Dev
Portfolio Ret (%) Year Year Year Inception (%)
Model Shadow Stock Portfolio (15.9) (23.9) 5.1 13.8 14.0 33.6
Vanguard 500 Index (VFINX) (12.8) (0.4) 13.2 9.0 9.9 17.9
Vanguard Small Cap Index (NAESX) (13.6) (11.4) 9.1 9.4 9.9 22.5
Data as of 5/31/2022.
AAII JOURNAL J U LY 2 0 2 2 29
AAII.COM/JOURNAL

Performance During Corrections TABLE 1

We examined the monthly total returns of Corrections Over Existence of Model Shadow Stock
Portfolio
the Model Shadow Stock Portfolio along with
the Vanguard 500 Index fund to gain a sense Model Shadow Vanguard 500
of the frequency, duration and severity of cor- Corrections (10% or Greater Decline) Stock Portfolio Index (VFINX)
rections and bear markets over its history. Number Observed 11 6
Drawdowns measure the severity of a loss. Average Length 1.5 years 2.1 years
The drawdown is the decline from a prior Shortest Duration 2 months 4 months
high in portfolio or market value. Drawdowns Longest Duration 3.4 years 6.2 years
reflect the total drop experienced during a Average Drawdown (25.5%) (27.8%)
Largest Drawdown (63.4%) (51.0%)
bear market, but the duration is longer since
the drawdown also reflects time needed Bear Markets (20% or Greater Decline)  
before the full loss is recouped, not just when Number Observed 6 4
the downturn is reversed. For example, the Average Length 2.1 years 3.0 years
Vanguard 500 Index fund hit bottom during Shortest Duration 8 months 6 months
March 2021, but it did not recoup its losses Longest Duration 3.4 years 6.2 years
until June 2021. Average Drawdown (36.4%) (34.5%)
Our analysis relied on monthly total-return Largest Drawdown (63.4%) (51.0%)
data, which can mask some of the shorter-lived
Rolling Holding Periods With Losses    
corrections that occur mid-month. For exam-
Monthly Holding Periods 38% (136 out of 354) 34% (120 out of 354)
ple, the S&P 500 correction that occurred on
1-Year Holding Periods 27% (91 out of 343) 17% (60 out of 343)
February 22, 2022, was not part of the monthly
5-Year Holding Periods 5% (15 out of 295) 17% (49 out of 295)
return data, which registered a combined 10-Year Holding Periods 0% (0 out of 235) 10% (24 out of 235)
8.0% total-return loss for the Vanguard 500 Figures calculated from monthly total returns. Data as of 6/17/2022.
Index fund in the first two months of 2022.
We did however include the June 2022 perfor-
mance through June 17, 2022, in our analysis to capture If you examine various rolling holding periods, the
the current bear market. likelihood of seeing a loss starts to diminish, yet the pos-
Corrections are generally classified as declines of 10% sibility remains until the holding period extends out
or greater. As Table 1 shows, the Model Shadow Stock many years. For the Model Shadow Stock Portfolio, we
Portfolio has had 11 observed corrections, and six of them observed losses 27% of the time over rolling one-year
have turned into bear markets of 20% or greater. The periods compared to 17% of the time for the Vanguard
average correction has been 1.5 years in length, with an 500 Index fund.
average drawdown of 25.5%. The longest correction for With five-year holding period returns, losses were
the Model Shadow Stock Portfolio was 3.4 years and had a observed only 5% of the time for the Model Shadow Stock
drawdown of 63.4% (July 2007 to November 2010). Portfolio, compared to 17% of the time for the Vanguard
Using monthly total-return data, the Vanguard 500 500 Index fund. Historically, with 10-year holding peri-
Index fund has had six observed corrections and four ods, there were no losses for the Model Shadow Stock
of them have gone on to become bear markets of 20% Portfolio, while around 10% of the Vanguard 500 Index
or greater. The average correction has been 2.1 years in fund’s 10-year holding periods resulted in losses. The
length, with an average drawdown of 27.8%. The longest 10-year holding period returns that capture both the tech
correction (September 2000 to October 2006) was 6.2 bubble bursting in the early 2000s and the financial cri-
years, with a drawdown of 44.8%, but the greatest draw- sis of 2007–2008 hurt large-cap stocks more than small-
down of 51.0% was with the 2007 bear market that lasted cap value stocks.
4.8 years (November 2007 to July 2012). It is important to consider that past performance is no
The greater volatility combined with the stronger long- guarantee of future results, but a study of historical mar-
term return of the Model Shadow Stock Portfolio is also ket performance is insightful. Small-cap returns have
reflected in observed losses for various holding periods over been more volatile than the returns of large companies.
the history of the portfolio. Looking at individual monthly Small-cap returns have been greater than the returns of
returns, the Model Shadow Stock Portfolio has been down large-cap companies over the long term, but there are
for 38% of individual months compared to 34% for the S&P often streaks of outperformance followed by underper-
500 as measured by the Vanguard 500 Index fund. formance. The Model Shadow Stock Portfolio has more

30 AAII JOURNAL J U LY 2 0 2 2
 AAII.COM/JOURNAL

TABLE 2
Model Shadow Stock Portfolio
Current 52-Week Market P/E P/B Div
Price High Low Cap Ratio Ratio Yield
Company Ticker ($) ($) ($) ($ Mil) (X) (X) (%) Notes
Advanced Emissions Sol ADES 4.78 8.19 4.68 94.3 2.0 0.61 0.0  
Ampco-Pittsburgh Corp. AP 3.51 6.71 3.35 74.8 nmf 0.81 0.0 earnings probation 2021Q4
Bassett Furniture Indus BSET 16.16 30.71 13.16 163.6 8.6 0.95 3.5  
Beazer Homes USA, Inc. BZH 13.21 23.97 13.08 471.9 2.5 0.50 0.0  
Big 5 Sporting Goods BGFV 10.57 47.65 10.39 251.6 2.6 0.85 9.5 qualifies as of 6/13/2022
Container Store Group TCS 7.19 14.25 6.70 375.1 4.4 0.83 0.0 qualifies as of 6/13/2022
Covenant Logistics Group CVLG 22.05 34.75 17.23 351.7 5.2 1.02 1.1  
Delta Apparel, Inc. DLA 27.21 35.00 24.10 193.2 6.7 1.07 0.0  
Dixie Group Inc. DXYN 1.60 6.98 1.60 27.6 12.1 0.38 0.0  
Ducommun Incorporated DCO 45.78 58.18 40.00 564.0 4.1 1.13 0.0  
Ennis, Inc. EBF 17.36 21.87 16.94 458.8 15.6 1.48 5.8  
Fonar Corporation FONR 15.42 19.32 14.24 108.3 10.6 0.72 0.0 qualifies as of 6/13/2022
Global Ship Lease Inc GSL 19.16 30.02 15.30 771.1 3.0 0.88 7.8  
Hooker Furnishings Corp. HOFT 15.84 41.10 15.13 199.8 35.3 0.72 5.1 qualifies as of 6/13/2022
Hurco Companies, Inc. HURC 25.43 37.45 25.24 170.9 18.5 0.72 2.4 qualifies as of 6/13/2022
Key Tronic Corp. KTCC 5.03 7.48 4.94 53.3 21.5 0.44 0.0 qualifies as of 6/13/2022
Kimball Electronics Inc. KE 20.01 30.61 16.66 497.0 11.1 1.11 0.0  
Mesa Air Group Inc. MESA 2.43 10.15 2.42 100.4 nmf 0.20 0.0 earnings probation 2022Q1
Pangaea Logistics Sol PANL 5.70 7.05 3.42 277.9 3.1 0.95 5.3  
Perion Network Ltd. PERI 17.15 33.09 15.76 840.5 13.9 1.55 0.0  
Rocky Brands Inc. RCKY 33.55 59.56 33.04 264.6 10.6 1.20 1.8  
SigmaTron International SGMA 6.15 17.30 4.64 40.1 2.5 0.33 0.0  
Strattec Security Corp. STRT 32.60 50.72 29.50 129.8 13.3 0.66 0.0 qualifies as of 6/13/2022
Titan Machinery Inc. TITN 23.97 38.58 22.01 572.1 7.4 1.18 0.0  
Ultralife Corp. ULBI 4.78 9.21 4.24 79.2 nmf 0.66 0.0 earnings probation 2022Q1
Vishay Precision Group VPG 28.91 39.71 28.32 403.3 18.3 1.40 0.0  
VOXX International Corp. VOXX 8.37 15.57 5.85 208.4 nmf 0.53 0.0 TTM adjusted earnings pos
VSE Corporation VSEC 34.95 65.42 34.91 470.5 50.0 1.05 1.1
nmf = no meaningful figure
Source: AAII Stock Investor Pro/Refinitiv. Data as of 6/13/2022.

Approaching Size Limit: Stocks are sold if their market capital-
ization goes above three times the initial maximum criterion and
there is a stock to replace it. The current market capitalization
maximum for initial screening is $400 million. Stocks are marked
“approaching size limit” if their current market cap exceeds 2½
times the initial criterion, or $1.0 billion.
earnings prior to 12-month earnings becoming positive, the stock
is sold. When available, adjusted (non-GAAP) earnings are used
to put stocks on probation or sell them. Otherwise, earnings from
continuing operations are used. The date is the fiscal quarter dur-
ing which the company first reported negative trailing 12-month
earnings.

Approaching Value Limit: Stocks are sold once their price-to-book-
value ratio goes above three times the initial criterion and there is a
stock to replace it. The current initial price-to-book ceiling is 0.90.
Stocks are marked “approaching value limit” if their current price-
to-book-value ratio exceeds 2½ times the initial criterion, or 2.25.
Earnings Probation: If last 12 months’ earnings are negative, the
stock is put on probation; if a subsequent quarter has negative
Qualifies as of: Stock still qualified as a buy when the screen was
run with current data. Stocks that don’t currently qualify as a buy
are held until they meet one of the sell rules.
TTM Adjusted Earnings Positive: Trailing four-quarter GAAP
earnings are negative, resulting in no meaningful figure for the
price-earnings ratio. However, adjusted earnings for the period
are positive.

See the AAII Shadow Stocks area of AAII.com for more information.

AAII JOURNAL J U LY 2 0 2 2 31
AAII.COM/JOURNAL
frequent corrections and bear market cycles than the S&P
500, but the down periods have generally been shorter in
duration and bull market reversals stronger.
Quarterly Review
We conducted our quarterly Model Shadow Stock
Portfolio review with the background of a volatile and
uncertain stock market. We let the model portfolio rules
guide our actions. The quarterly portfolio review is tied
to the quarterly earnings reporting cycle of domestic
companies. Companies are normally sold from the model
portfolio if earnings turn negative or if strong growth
and positive expectations push up the size of the com-
pany and its valuation beyond our desired levels.
The review begins with an examination of the prevail-
ing valuation segments of the marketplace. The Model
Shadow Stock Portfolio selection criteria targets the
“cheapest” 10% of domestic stocks as measured by the
price-to-book-value (P/B) ratio. The decile breakpoint
for value is determined by examining price-to-book lev-
els of domestic companies listed on the New York Stock
Exchange (NYSE) and then using the price-to-book break-
point for stocks listed on all domestic exchanges.
We determined the maximum price-to-book value
for the lowest decile (lowest 10%) value universe among
NYSE-listed stocks using AAII’s Stock Investor Pro
stock screening program. The price-to-book cutoff had
decreased slightly from 0.90 in March to 0.89. With the
current initial qualifying maximum price-to-book ratio
at 0.90, we are leaving it unchanged. Qualifying stocks
must have a price-to-book ratio of 0.90 or lower. Stocks in
the model portfolio are sold for valuation if they exceed
three times the minimum initial price-to-book ratio at
the time of a quarterly portfolio review. In other words,
for this quarter’s review we use a price-to-book cutoff
of 0.90 to screen for stocks to add to the Model Shadow
Stock Portfolio and 2.70 (0.90 × 3) as the maximum price-
to-book ratio to keep stocks in the portfolio.
Table 2 shows the current holdings in the Model
Shadow Stock Portfolio. As of June 13, 2022, Perion
Network Ltd. (PERI) had the highest price-to-book-value
ratio in the portfolio. Its price-to-book ratio of 1.55 is well
below the 2.70 value used to remove stocks from the
model portfolio. Therefore, no stocks are being sold this
quarter for exceeding the valuation limit of the model
portfolio.
We then examined market-cap levels of the compa-
nies listed on the NYSE to determine the size cutoff for
the lowest decile. Here the market-cap level maximum
was $383 million, compared to $429 million in March
2022. The decline was not significant enough to warrant
32 AAII JOURNAL J U LY 2 0 2 2
a change to the portfolio rules. The maximum market
cap for inclusion in the Model Shadow Stock Portfolio is
$400 million, and holdings are sold if their market cap
goes above three times the initial criterion at the time of
the quarterly review: $1.2 billion.
Perion Network also had the highest market cap in
the portfolio, with a value of $840.5 million as of June 13,
2022. Its market cap was well below the removal level of
$1.2 billion, so no stocks are being removed this quarter
for exceeding the size limit of the model portfolio.
The other major factor that leads to portfolio turnover
is tied to negative earnings. If a company reports trailing
12-month earnings from continuing operations that are
negative, the stock is placed on probation; if a subsequent
quarter has negative earnings prior to trailing 12-month
earnings becoming positive, the stock is sold.
Coming into the quarter, only Ampco-Pittsburgh Corp.
(AP) was on earnings probation. The company reported
positive fully diluted earnings of $0.084 per share for the
quarter ending March 31, 2022. While the results were
not strong enough to raise the trailing earnings per share
figure into positive territory, the company does not meet
the earnings sell rule. During the quarter both Mesa Air
Group (MESA) and Ultralife Corp. (ULBI) reported losses
great enough to push their trailing 12-month earnings
into negative territory. The firms are now on earnings
probation.
A stock can also be removed if it has been held for over
four years if it also no longer meets the initial rules for
qualifying and has not gained at least 10% annually from
its purchase price and there is a new qualifying stock to
replace it. The four-year rule is normally enforced during
the year-end review.
No stocks met the portfolio sell rules during the quar-
terly review, so we are leaving the portfolio unchanged.
Next Portfolio Review
The next quarterly review takes place after the end
of September 2022. Any changes to the portfolio are
reported at the time they are made in our Model Shadow
Stock Portfolio Update emails (sign up at www.aaii.com/
email). ▪
JOIN THE CONVERSATION ONLINE
Visit AAII.com/journal to comment on this article.
MORE AT AAII.COM/JOURNAL
Year-by-Year Returns Better Illustrate Shadow Stock
Portfolio’s Variability by John Bajkowski, January 2022
Model Shadow Stock Portfolio Reflects Small-Cap
Value Dominance by John Bajkowski, October 2021
Model Shadow Stock Portfolio Recovers Faster Than
Market by John Bajkowski, May 2021
Member News AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS
SUMMER 2022, NUMBER XXXVII

Members Learn and Share Through PRISM Academy

This year, AAII rolled out a new feature in the AAII Com-
munity called the PRISM Academy. The PRISM Wealth-
Building Process is designed to give members a framework
for aligning their investment decisions with their financial
goals. The academy setting offers members an interactive
space where they can discuss their questions and issues
with other members as they go through each step.

Goal Setting at All Ages

Most longtime investors may think, “Why would I need to
start by writing down and prioritizing my goals?” This may
be the first thought of members logging into the online AAII
PRISM Academy for the first time. With the PRISM Wealth-
Building Process, goals are a central theme to investing
success. They give you the direction, motivation and drive
to invest and plan for your future self.
By skipping the first step of PRISM—P, Prioritizing Your
Goals—you miss a crucial part of the course that involves
self-reflection. With clearly defined goals, investors can
set themselves up for success and identify which objec-
tives are the most important, how far off their goals are,
how much money will need to be saved in order to achieve
those goals, as well as the duration of their goals to ensure
there is enough money to fund them.
Embrace the Cyclical Process
We chatted with Robert M., a lifetime AAII member
and PRISM Academy participant, about his experience
of starting the process with goal setting. Robert was over-
whelmed by the sheer volume of resources AAII Platinum
offers members and turned to PRISM to help digest some
of the content. “I decided to work through the PRISM Acad-
emy, even though I am not a new investor. Having a project
background, I was drawn to the fact that you start PRISM
with written goals,” shared Robert. “Now that I have nearly
finished the steps, I can say that the written goals step was
the best part! I thought I had my correct goals in mind but
found through Charles Rotblut’s videos that I missed the
most important one.”
By going through the five-step PRISM Wealth-
Building Process, Robert was able to prioritize his goals
and develop a cyclical plan he could use time and time
again. “Since I retired, my actual #1 goal is to remain able
to support myself financially. My other goals turned out to
be aspirational, and some of them may not be realistic. Just
this one thing made the entire PRISM program a success
for me,” said Robert.
Within the PRISM Academy, countless AAII members
learned the difference between types of goals and why it is
important to clearly define what you’re working toward, as
well as why you should rank your top three. “I really appre-
ciate you differentiating between aspirational and regular
goals,” Robert went on. He revealed that he wanted to give
back to his church and community. He had to understand
how far off that goal was, how much it would take to fund it
as well as the duration of funding that goal would require.
Robert commented, “Now I can start on that plan, being
sure I will be positioned to do something significant.”
Simple and Clear Steps to a Plan That
Works for You
As a lifetime investor, Robert already had a wealth of
knowledge and experience with investing as well as with
building a portfolio. But as you may know, learning doesn’t
stop just because you have experience in something.
Robert said he was overjoyed to learn about the PRISM

AAII JOURNAL J U LY 2 0 2 2 33
Academy and that it was a simple and easy process to
cross-check that he was on the right path to funding his
financial goals. “Thank you for making this available just
when I was looking for a better way to invest!” enthused
Robert.

PRISM Wealth-Building
Process Flowchart
Revise as
Step 1: Necessary
Prioritizing Your Goals
And Robert isn’t the only one. There are hundreds of
AAII members, beginning through advanced, that have uti-
lized the wealth of information the PRISM Academy holds.
Step 2:
Recognizing Your Risk In the first step you lay your foundation by prioritizing your
Tolerance and Allocation
goals, then you learn how to recognize your risk toler-
ance, identify your investment management preferences
and select as well as manage which investments go into
Step 3:
Identifying Your Investment your portfolio. At the end, you develop a clear monitoring
Management Preferences
process that will assist you as you go through life stage
Adjust
changes or as your allocation needs a refresh.
portfolio as
Necessary
Step 4:
Selecting and Managing
Your Investments
Join the Club
If you’re interested in learning how to effectively develop
a plan and have the confidence to follow it, jump into the
online AAII PRISM Academy today to ensure you’re on the
right track to fund your future goals! Visit https://community.
aaii.com to log into your AAII account and click the button
Your Step 5: Your Progress
Allocation Monitoring and Life Stages
that says “Join” get started today in the PRISM Academy. ▪

AAII Community Grows to Address Member Needs

Over the past six months, we’ve been bolstering up our Allocation Strategies, Stock Screening, Options Investing
integrated, online AAII Community platform where inves- Strategies, Sustainable Investing (ESG) and Mutual Funds
tors can bounce ideas off other members, share their per- & ETFs. New communities are continually developed to
spectives on various strategies and interact with members cover specific topics so you can always find a group that
across the nation. fits your individual investing needs. ▪
Two Community groups stand out: the Income Investing
and Retirement Withdrawals Communities. These groups
help members understand how to get into the income invest-
ing arena as well as plan for retirement withdrawals that
could potentially battle inflation. Hundreds of members are
actively engaging with one another as they discuss the pros
and cons of target-date funds and how to invest in bonds as
interest rates continue to rise. In a matter of minutes, inves-
tors have their questions answered and are offered new
perspectives on techniques to weather the storm.
Community discussions are easy to join and a FREE
benefit for all AAII members. Additional groups include

34 AAII JOURNAL J U LY 2 0 2 2
AAII Journal Online Gets a Facelift
The AAII Journal webpage at AAII.com has been
recently upgraded. The online AAII Journal is now fully
optimized for smaller mobile device screens, removing the
need to pinch and zoom to read an article.
A handy “Save” function has also been added to all arti-
cles. Use the bookmark icon to save an article and then
access your saved articles in My Library at the www.aaii.
com/journal page.
In addition, the redesigned AAII Journal home page
highlights recent videos where popular authors share their
financial know-how.
Choose the AAII Journal tab at AAII.com to check out all
the new features. ▪

Academic Awards: Fostering Investment Education and Research

Four papers won awards for investment research from
AAII in 2022. The awards are presented as part of AAII’s
ongoing effort to encourage education and research in the
area of investments and are given for papers that provide
insight into investing.
The awards are made in conjunction with the meetings
of major finance associations around the country. The best
academic paper presented at these meetings is selected
by a committee of investment research experts.
AAII awards the writers of winning papers. Papers
are selected based on the quality and thoroughness of
research and on the contribution to shaping effective
investment decisions.
Since the program began in 1983, more than 150 awards
have been presented. Recent award-winning papers and
recipients include:
» “Democratization, Inequality, and Risk Premia,”
by Max Miller of University of Pennsylvania, awarded
by the Financial Management Association.
» “Do pre-IPO investments generate information
advantage? Evidence from mutual funds,” by
Julie Ngo and Albert Wang of Auburn University,
awarded by the Eastern Finance Association.
» “From Man vs. Machine to Man + Machine: The
Art and AI of Stock Analyses,” by Sean Cao and
Baozhong Yang of Georgia State University, Wei
Jiang of Columbia Business School and Junbo
Wang of Louisiana State University, awarded by the
Midwest Finance Association.
» “Identity, Diversity, and Team Performance: Evi-
dence From U.S. Mutual Funds,” by Richard Evans
of University of Virginia, Melissa Prado and Emanu-
ele Rizzo of Nova School of Business and Economics
and Rafael Zambrana of University of Notre Dame,
awarded by the Southern Finance Association.
These papers are technical; however, the AAII Journal
does publish the findings of papers that are of particular
interest to individual investors. Links to the papers are
available in the online version of this article. ▪

AAII Financial Summary

Annually, AAII publishes its year-end balance sheet for members and life members interested in the finances of the
association. Prior years’ balance sheets can be found online in the Member News sections of past AAII Journals.
American Association of Individual Investors
Unaudited Balance Sheet for the period of December 31, 2021
Assets Liabilities and Fund Balance
Current Assets .............................. $911,145 Accounts Payable ....................................$567,366
Investments ................................. 2,958,858 Deferred Membership Revenue .............5,200,826
Net Fixed Assets............................... 51,402 Deferred Life Membership Revenue.......9,427,041
Fund Balance .................................... (11,273,828)
Total Assets…………………… . $3,921,405
Total Liabilities and Fund Balance....$3,921,405

Note: Deferred membership revenue is recognized periodically as income over the membership period. Deferred life membership is recognized periodically as income
over a 25-year period. This accrual method of accounting reflects the Association’s long-term obligation to its members.

AAII JOURNAL J U LY 2 0 2 2 35
Supplemental Benefits
AAII offers several supplemental benefits to members.
These include discounts on financial publications and an
insured money market deposit program from Discover
Bank.
We view these programs as supplemental benefits and
do not want to lose sight of our main purpose. However,
many of these programs are helpful to a significant num-
ber of our members; in some cases, they provide AAII
Supplemental Benefit: The AAII Discover Bank Deposit Program
AAII has an agreement with Discover Bank® to give
AAII members access to preferred member rates on
Discover Bank certificates of deposit (CDs), IRA CDs,
money market accounts and online savings accounts.
The AAII preferred member interest rates are higher
than Discover Bank’s nationally advertised rates on
comparable Discover deposit accounts.
Though you may know Discover for its credit
card and other lending products, Discover Bank has
become one of the leaders in the online banking space
with over $60 billion in consumer deposits.
Visit www.aaii.com/discover or call Discover at (800)
347-7513 to learn more about these deposit products
and the preferred AAII member rates you will earn.
AAII Privacy Policy
Our goal at AAII is to offer you the best investor educa-
tion in a simple and secure manner via internet and print
methods. As a publisher, we gather user and member infor-
mation in order to provide an investor-friendly service.  and services that we believe may be of interest to those
We request your email address as part of the registration
process for AAII.com. We use this information to contact
our members and guest users regarding updates to the
website and to personalize the service.
AAII tracks website activity and usage through log
analysis to produce a better web product for our members.
Some measurements include click activity and time in site.
AAII.com uses cookies to remember login settings and
facilitate navigation through the site. AAII may also use
third-party advertising networks that employ cookie tech-
nology, but as a publisher we don’t control or have access
to those cookies. We do not extract personal information
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AAII maintains a subscriber list. As a publisher/mem-
bership organization, we reserve the right to contact our
users for our legitimate business needs, such as email and
paper mailings regarding AAII products and services, or
36 AAII JOURNAL J U LY 2 0 2 2
with additional income. For example, with the Discover
money market program, AAII receives 0.05% per year on
the outstanding deposits. These funds help us to support
our investment research grants and to educate individual
investors.
Future supplemental benefits will also be offered as
opportunities, and not as recommendations. Only you can
decide what is best for you. ▪
As an AAII member saving with Discover, you will
benefit from:
• No fees1
• No minimum to open or maintain your account
• Preferred member rates
• Easy and convenient online account opening
and management
• 24/7 customer service
• Deposit accounts offered by Discover Bank,
Member FDIC
1
Outgoing wire transfers are subject to a service charge. You may
be charged a fee by a non-Discover ATM if it is not part of the
60,000+ ATMs in our no-fee network. A penalty may be charged for
early withdrawal from a certificate of deposit.
fulfilling a transaction initiated by the user. However, we do
on occasion make portions of this list available to carefully
screened companies that offer personal finance products
affiliated with AAII. To the extent we process your per-
sonal data for other purposes, we ask for your consent in
advance or require that our partners obtain such consent.
If you do not want to receive these offers, please let us
know by contacting AAII Member Services at members@
aaii.com.
You have control over your personal information and how
it is collected, used and shared. To manage your account
and the content contained in it, as well as edit some of
your personal data and manage your privacy preferences,
go to your My Account page. If you do not want to receive
marketing materials from us, you can opt out at any time by
simply clicking the ‘unsubscribe’ link in any email, or updat-
ing your preferences in the email management section of
your user account.
This privacy policy is subject to change. For the most
current version, visit AAII.com. ▪
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“The American Association of Individual Investors is an independent nonprofit corporation formed in 1978 for the purpose of assisting
individuals in becoming effective managers of their own assets through programs of education, information and research.”