Withdrawals From AIM ...
Thanks Again for your comments Bernie, which raise some questions in my mind. In particular how does one handle a withdrawal in AIM?
First a point of definition however. I do not consider commissions to be a withdrawal (though perhaps they should be?) in the same way that I do not consider interest income on the cash balance or dividend income from the stocks as deposits. To me all of these things are items which only affect the cash balance whereas deposits and withdrawals should (normally) affect both cash and stock holdings and therefore indirectly, the portfolio control.
I view an AIM account as a combination of both cash and stocks. Therefore any withdrawal from an AIM account should reduce both the cash balance and the stock holdings except perhaps in some very unusual situations. For example if the proportion of cash were too high with respect to the current Idiot Wave recommendations and would still remain too high even if the full amount of the withdrawal were taken from cash then in this case I could see no reduction in the stock value. However even then I could see a possible change in the portfolio value.
Before going into more detail however let me first say that this is mostly an academic question to me. In practice any withdrawals that I make are complete withdrawals which in effect close the AIM account. Even though one can imagine the need for a partial withdrawal (e.g. to pay a tax liability on the gains within the AIM account) so far I have not had to do so.
Consider the following situation. I have an AIM account worth a total of $20,000 of which $6,000 is in cash and $14,000 is in stocks. The current portfolio control value is $15,000. It can be seen that this is a hold position if buy and sell SAFEs are both at 10%. I wish to withdraw $4,000 from this account.
Of course the first thing I think that one should do is to analyze the account and determine its current status. Then if there needs to be some kind of adjustment one should first effect a notional buy or sell and then make a notional adjustment to the portfolio control. At this point one could start with this notional account and determine how the withdrawal should be handled. These necessary notional steps should also be made. Then the net effect of the two notional steps could be implemented. This would, for example, lead us to sell 200 shares rather than buy 100 shares and then sell 300 shares.
In the above example I assume that such notional adjustments have already been made. Thus for example the proportion of cash to total value of 30% is within the acceptable range. How would AIMers effect this withdrawal? Below I present two possible methods. If the AIM method is not one of the two I would appreciate hearing how AIM handles this.
The Money Spinner method is explained below as Method A. I do not like it and probably would not use if I needed to make a partial withdrawal. Method B below is my own method and the one I will use unless and until someone can show me a better or more logical method. As noted above however this is not a big issue with me yet.
METHOD A
(1) Withdraw one half of the total withdrawal amount from cash. In our example this would mean withdrawing $2,000 from cash leaving a cash balance of $4,000.
(2) Sell shares in the amount of one half of the total withdrawal amount which in this case would reduce the total share value to $12,000.
(3) Reduce the Flow Limit (i.e. the Portfolio Control) by one half of the amount of the shares sold. In this case shares sold total $2,000 and so we would reduce the Portfolio Control by $1,000 to $14,000.
(4) Reduce the number of shares held by the number of shares sold.
(5) Revise the BUY and SELL orders on the basis of the new number of shares and the new Flow Limit.
NOTE: These last two items refer to the Money Spinner Method and were added only for completeness. I see two problems with this approach. First the proportion of cash in the AIM account has been reduced from 30% to 25% of the total value. Even if 30% had been enough prior to the withdrawal the resulting 25% may not be. Second the portfolio control has increased from 12/16 of the total account value to 14/16 of the total account value. Even if we modified this method to reduce the portfolio control by the full amount of the stock sale (as Bernie's note seems to imply) the portfolio control would still increase to 13/16 of the total account value. This change in balance of the portfolio control may or may not be an improvement but in any event we have altered the dynamics of the remaining portion of the account.
METHOD B
(1) Assume that this AIM account were really two separate AIM accounts, each with an identical history except that one of them started with an amount that has accumulated to a total account value of $16,000 and the other has accumulated to $4,000. Our $4,000 withdrawal is simply the complete closing of this second account.
(2) Since $4,000 is 20% of $20,000 we simply set our three
target values for the remaining account to be 80% of the current account. Thus our new cash value will be $4,800 and the new stock value will be $11,200 and the new Portfolio Control will be $12,000.
(3) Thus withdraw $4,000 from cash and at the same time add $2,800 to cash by selling $2,800 worth of stock. We also reduce portfolio control by $3,000 which is (curiously) greater than the total actual amount of the stock sold.
I am curious to hear what AIMers think of these two methods and more curious to see what AIMers use if it is different from either of these methods.
Thanks,
Barry Savage
mailto:bv@bsavage.net
bsavage.net |
