Hi Bernie, While Mr. Lichello doesn't mandate that stocks be from the same industry sector he also cautions against over-diversification. A diversified portfolio will participate in broad market expansions and contractions without any muss or fuss. It will be closer to a BETA of 1.0 because of its diversification.
As I've mentioned before, I think smaller accounts can use commercial mutual funds successfully with AIM. There won't be a lot of activity, but we don't use AIM to be active, but to be responsive. If no activity is required, then none should be generated. I think this is hard for many new to AIM. No matter what their background, they may be misled by Mr. L's 10-8-5-4-5-8-10 theoretical model into thinking they have to be glued to their computer screen and simultaneously be listening to every word spoken on CNBC to be successful in their efforts.
As you've stated in the past, AIM's designed to make money with a low level of effort. I think lots of folks make it more difficult than it needs to be.
I'm not sure there's many mutual fund companies that set up their accounts with equal weighting in each investment in the portfolio. I guess that's one way, but it seems to me that we have to evaluate the relative quality of each investment, the relative risk and where it fits in our overall investment pyramid before assigning how much to place at risk in each. If one required a significant amount of income from the total portfolio, it might be disaster to equally weight a diversified portfolio.
A better approach is to first design the investment pyramid to satisfy the most basic needs of the investor. Then select and weight the components in accordance to that overall plan. I don't think it makes sense to give equal weight to a bond fund and a biotech start-up.
Going back to an earlier theme, there are many ways to provide some portfolio insurance for one's account. Diversification is one, AIM is another. There are many other strategies as well, but again, we're not attempting to make life more complicated. To a degree, one can use both diversification and AIM together. However, as Mr. L said, it would be foolish to own 5 mutual funds when each has essentially the same portfolio.
So, here's some thoughts:
1) small accounts can gain good diversification by buying into mutual funds and using AIM to manage.
2) larger accounts, to get a bit more AIM activity could also use sector funds.
3) still larger accounts can create their own "mutual funds" or baskets of stocks that they have picked for their own reasons.
4) some investors may want to choose to use AIM on individual stocks.
5) the more diversified the portfolio, the lower the demand upon the CASH RESERVE will be during market and economic traumas.
This last item is rarely discussed. Just as I attempt to give broad advice with the Idiot Wave to AIM users who invest in individual stocks and mutual funds, one has to realize that there's different levels of risk involved. I've never taken the time to prove it, but it is my opinion from years of managing my own money that one can do almost equally well with mutual funds as with individual stocks while using AIM. Part of the reason is that individual stocks require MUCH MORE CASH to remain on hand near market peaks to allow adequate buying power as market prices decline. Although that cash earns interest, the interest usually pales compared to growth on the equities.
So, one can choose to start with, say, 50% cash while buying an individual stock or 33% cash while buying a quality diversified mutual fund. In one case, only half of your money is working for you while in the other case 2/3s is in there working. I think this is why my IRA, which is all invested in just 2 mutual funds, has about equaled my personal account in the long run.
If one sets up their AIM account as a personal diversified mutual fund with 10 or 20 stocks in it, the overall cash reserve requirements on average would be less than if one ran each individual stock as an AIM account. Many times my overall account is near the IW's Mutual Fund setting for cash reserves even though I'm running the individual stocks near their own, much higher cash reserve levels indicated by the IW's Stock setting. This is because some stocks are up and some will be down which gives me an average cash reserve that's not too far of the IW Mutual fund suggestion. (note that my cash reserves are currently much lower than that suggested amount!)
I hope this doesn't sound too preachy today. I'm attempting here to fill out on your post, not dispute anything you are saying. You have consistently helped bring the readers back into focus on their objective of consistently having a winning investment portfolio. I also agree with you and Mr. Lichello that a major objective is to keep it as simple as possible.
Thanks,
Tom |
