Good Morning Larry, Other than accumulated interest or cash dividends, AIM is the only thing that should be changing how much cash you have in your accounts. Personally, I don't even bother with the interest or dividend income inside of Newport, since I take that money as my cash flow for living expenses.
It's easiest to just let AIM be your guide. I'd suggest 33% starting Cash Reserve for diversified mutual funds (the Lichello recommendation and the default in most of the software) and 50% for individual growth stocks and sector funds (the original Lichello suggestion). Then just follow AIM's advice.
Should you find after a few years of AIMing that you're just accumulating way too much cash, then you might want to try out using the Idiot Wave as the cap on your reserves. Jeff Weber uses another plan. He syphons off excess cash above the 50% mark and utilizes it to start new AIM accounts when he has "harvested" enough cash. That's what I call the Cash Cow method. If you are still diversifying your portfolio, this is a great method.
The Idiot Wave can be used when starting a new AIM account as the suggested starting cash reserve in place of the "default" setting. After that, it's only a guide to the maximum amount of cash you might want to hold as a percent of total in your accounts. As an example, say you have XYZ as a stock and in your AIM account for that stock it represents 75% of the value with an additional 25% in cash. The Idiot Wave says that the maximum cash you should need for the market's conditions is 36% currently. So, should you get Sell Market Orders for XYZ, you should execute that order. It will shift the equity/cash ratio. After the trade, maybe you'll only have 72% invested and 28% in cash. This is still within the guidelines of what the IW is suggesting.
After a period of time and several sales, the equity/cash ratio has now shifted to 60% XYZ and 40% cash. With the IW at 36%, it's telling you that you should have enough cash on hand for the apparent risk of the market. In my way of using the IW, I then quit selling when AIM gives me a market order. Instead, I "Pull a vealie." This involves taking AIM's current market order suggestion and dividing the value by two. The resulting value I add to Portfolio Control. (this is done in place of actually selling shares)
Two things happen here. We increase the Portfolio Control by a small amount which translates to a small increase in our risk envelope. This also shifts the HOLD ZONE upwards a bit. By doing so, not only does the next Buy Price rise slightly, but so does the next Sell Price.
This 'vealie' process is repeated as many times as is necessary over the next period of time as the price of XYZ continues to rise. Eventually the Cash Reserve as a percent of the account value is reduced to something below the level that is currently being recommended by the Idiot Wave (not the dollar amount, but the percentage). Let's say the IW is now calling for 40% cash and you now, after a couple of 'vealies' have only 36% on hand. Well, then it's time to start taking AIM's Sell Market Orders seriously again and sell the recommended amount.
With that sale, the cash reserve jumps back up to right about what the IW's suggestion is and we are back in balance.
Now, let's assume we're in a major bullish trend, but the market risk is continuing to rise. Your cash reserve is now 40%, but the Idiot Wave has been steadily climbing to 50% recommended. Well, you continue to sell shares whenever AIM recommends a sale until you reach the new cash percentage of 50% with 50% remaining in XYZ.
So, you don't sell shares to raise the cash to the IW's level, you only sell shares when AIM tells you to. Further, if you want to use the IW as a guide to the max. cash to hold for your equity, then you only sell when AIM says to and when your cash reserve is less than what the IW's suggesting.
Right now with 36% Cash Reserve as our Idiot Wave goal, most of my stocks don't have to worry about 'vealies' as they are well below that level. However, a couple of my stocks are already doing some selling - ADCT comes to mind.
aim-users.com There was zero cash in that account just a few weeks ago but now it's up to about 13% of total. That's still well below what the IW's suggesting. Should the stock rise over the next few weeks (months?) and AIM continue to sell into that rally, it's quite possible that the Cash Reserve could exceed the current IW reading. The IW is a moving target, so whatever the reading is in this hypothetical future time, that will be the upper limit of my selling at that time. Should it be 40%, then AIM and I are free to sell to that limit.
This takes a leap of faith in the Idiot Wave. What I've found over the years is that Sales and 'vealies' alternate. But usually a market correction comes along and reduces our cash on hand because of AIM buying. That eliminates the problem of "too much cash" in a pragmatic way! Then we go back to AIM selling until we again max out the cash reserve.
I hope this helps! :-)
Best regards, Tom |
