Q..........
Hi Tom......I follow with great curiosity this AIM group on your thread in Silicon investor......I notice that most of you have individual stocks in your AIM accounts....I wonder if you would comment on the statement made by Mr. Lichello on page #203 "AIM wasn’t built for a single stock; it was built for a portfolio of stocks"
While it is wonderful and gratifying to be invested in one stock and run in through the system along with others individually in a bull market such as we have had over the past years, you could probably throw darts and find a stock with some positive earnings and volatility and do OK, are any of you wondering if the diversification of a couple of them or more combined along with less activity isn’t wiser in this environment?
thank you.....Walt
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A..........
Hi Walt,
Other places in Mr. L's book he mentions that AIM will work with individual stocks or with the basket approach. It will also work with individual mutual funds, whether diversified or sector types. In the context of Mr. L's comment about it being designed for a portfolio of stocks, remember that the question regarded the fact that the period starting in 1969 to around 1979. It wasn't the bull market that we have had in recent decades. The questioner was commenting that several computer runs on individual stocks had proved to be very poor investments. I'm not sure that was the fault of AIM!
Please remember that risk management and insurance take many forms. Being invested in a single stock with 100% of your available funds gives the highest potential reward and also the highest risk. One way to moderate risk is to diversify. Another is to carry a cash reserve and use AIM. Each can act as a shock absorber for the portfolio. However, connecting one shock absorber to another might just eliminate too much of the volatility and certainly would confuse the issue of risk management.
Most mutual funds under-perform the market every year it rises and only shine when the market is falling. To an optimist this is bad news. To the pessimist, it's great! Such a mutual fund certainly qualifies as diversified, but would be a lousy AIM candidate. They've gained the stable environment they want by sacrificing up-side performance. AIM would be bored to tears with it.
Sector funds offer specific focus while offering some diversification away from a specific issue. These tend to move quite widely with sector rotation in the marketplace. Here AIM will find enough activity to keep itself happy benefiting from the rotations while offering some extra insurance with diversification. These products really weren't widely available until the 1990s.
There's always a cost for insurance. The cost in an investor's case is almost always lower performance while the market is in a bull phase. So, we don't want too much insurance. AIM provides quite a bit all by itself. Then it's a matter of whether we have the time and talent to select individual stocks, or individual sector funds, or broadly based mutual fund funds with diversified portfolios. Mr. Lichello planned to have lots of free time. He felt that selecting some great companies in a variety of industries was all he needed. He then felt that review of the entire portfolio on a monthly or maybe bi-weekly basis was all the work that was required. He didn't want to be glued to CNBC or a ticker service. He felt that was the last thing he wanted. He wanted, as do I, to receive the highest possible pay scale. In other words, the highest possible return on the time invested. This is where day traders make a mistake. They spend an incredible amount of time every day at their activity and don't necessarily do any better than the AIM user that puts in 5 minutes per equity per week. The AIM investor is paid much better on an hourly basis.
Finally, in the AIM book (possibly in the Q&A sessions) Mr. Lichello mentions that the "potential" for greater AIM returns is there with individual stocks being individual AIM accounts because of greater volatility. He also says that this implies greater risk - there's no way to uncouple Risk and Reward. He was not promoting the idea of individual stocks in the late '70s or early '80s.
Best regards, Tom |
