Hi HT, Good to see you here. Let me take these one at a time.
"Rising markets - AIM works better when adjustments are made to the cash/equity allocation from 50/50 to about 34/66. In the current market environment, a 50/50 allocation is too conservative and results in too much cash on the sidelines and a buy-and-hold would outperform an AIM 50/50 allocation. An evaluation of risk is made to determine the proper allocation."
As you noted in the last chapters of Mr. L's book, he changes his equity/cash ratio suggestion from 50/50 to 67/33. As a starting point for diversified growth mutual funds the new ratio is just fine. For most stocks with a BETA of 1.0 to 1.2 (as measured by Value Line) this ratio should work well also.
However, I have found that a heavier cash allocation is needed for the stocks that seem to work best with AIM. Stocks with BETA ratings of 1.4 and up need a heavier dose of Cash near market peaks to be able to buy all the way to the next market bottom. Usually 50% seems to be the right amount.
I offer my Idiot Wave as a guide to how that asset allocation should be set at any particular time. It's ranged from the mid-teens in percent to the mid 50% range at various times. A separate figure is given for mutual funds. Right now it's suggesting 47% Cash for high BETA stocks and 31% for mutual funds. Last October it was recommending 28% Cash for stocks and 18% for mutual funds.
Performance is enhanced any time we can remain more fully invested in a bull market. We then have to determine how much "buying power" we want to have on hand. I started 1998 with about 35% Cash on hand and it was well used in the Fall dropping to about 5% overall. My current account is now at about 25% Cash Reserve overall. Assuming that my overall account is sort of a "mutual fund" I guess I'm not too far off the mark.
"Selling - AIM sells too frequently in a rising market so passes should be made. Is this the "vealie" adjustment? Tom: What would really be helpful to me would be a comprehensive example of how AIM (as adjusted by "vealie" and other factors) works."
Yes, the "vealie" is used to achieve a "pass" when AIM's asking us to sell shares. We do this not as an arbitrary decision, but when our Cash Reserves are fully funded. This helps us conserve our "precious" shares for further capital gain.
I could provide an example out of my old LOTUS 123 AIM template for you if that would help. It would probably be best to mail it to you, however, as then I could add comments to the margins. If this sounds like a good idea, send me a PRIVATE MESSAGE with a mailing address. I guess I could see if I can copy an entire spreadsheet into these pages using the fixed font option and see how it looks. I'll give it a try.
I, too, has come to the conclusion that I needed a cash reserve for my investments long before reading Mr. L's book although my methods weren't as regimented. When I did read about AIM it seemed like Mr. L was patting me on the back. He said I was pointing in the right direction, but my AIM wasn't very good when shooting from the hip!
I'll see what I can do with a long term history.
Best regards, Tom |
