What Is the American Association of Individual Investors (AAII)?
The American Association of Individual Investors (AAII) is an investor education organization. It is a membership-driven non-profit with local chapters throughout the United States.
Understanding the American Association of Individual Investors (AAII)
AAII’s stated mission is to teach individuals to manage their own portfolios and to beat the average S&P 500 returns while taking on lower-than-average levels of risk. AAII disseminates its education materials largely through its website, AAII.com.
James Cloonan founded AAII in 1978 on the premise that a nonprofit organization is best designed to deliver unbiased investment advice. The organization’s website works on a freemium model, providing some investment information for free, but reserving most of the group’s materials, including a monthly journal, mutual fund analysis, stock screeners and model portfolios, for dues-paying members only.
It has been highly rated by the Better Business Bureau. Forbes has included the organization in its Best of the Web directory, noting the plethora of investment resources, and particularly praising its stock screens which mirror the various strategies of famous investors.
Limitations of the American Association of Individual Investors (AAII)
While AAII has provided many investors with sound educational resources, the value of membership varies according to the preferred investment strategy. Specifically, dividend growth investors, who favor investments that deliver ever-increasing dividend income, may find limited value in the stock screens, which prioritize price performance and total return and virtually ignore dividend payments.
All stock screens, even stock screens from nonprofit organizations, deserve scrutiny. For example, AAII’s screens don’t consider transaction fees when calculating percentage return, so a screen that represents frequent buying and selling will show a return higher than what an investor would receive in practice. Investors should also consider the number of holdings in a screen when judging its performance.
AAII regularly touts its portfolios’ dramatic performance results in marketing materials, but these model portfolios may only be available to the public after they’ve made their noteworthy gains.
In general, model portfolios exhibit an inherent flaw, at least for investors eager to follow their lead. The model portfolio naturally gets to buy or sell ahead of the mob of AAII members. All things being equal, the model portfolio can make the trade when it is most beneficial. That trade gets progressively less beneficial as it is made by member after member, seeking to replicate the results.
Investors should remember that even nonprofit organizations may be looking to sell something and that all claims of dramatic market outperformance should be approached cautiously with a high level of scrutiny and research.