Hello Duke,
I think both Tom and Bernie's answers to your question have merit.
Tom's point about having AIM immediately average down will work and most closely (but not exactly) simulates where you would be, today, had you started using AIM at the beginning.
The disadvantage of this method is that you will "start" your AIM account with very little cash (after your initial purchase). That means you'll be hard pressed to take advantage of any further price drops.
On the other other hand, Bernie's suggestion allows you to take advantage of further decreases in price, but (as Tom mentioned) can have you selling at a FIFO loss for a period of time.
So it comes down to whether you think your stock has a better chance of rising or falling. If you think it will rise, then Tom's method should work better. If you think it will fall, then Bernie's method will provide better returns. Of course the entire point of AIM is to eliminate trying to predict what a particular stock will do, but you might want to look at your case as an exception. You can use the IW to help you with your "prediction."
My personal leaning is towards Bernie's method. Here's why...
AIM is only concerned with the value of your portfolio when you START it. It doesn't care what happened before you started using it. As an example, let's say that last year you had invested $50,000 in INETMINUS, a highly speculative stock with a very poor chance of surviving in the long-term (BTW that symbol is made up for this example -- as if you couldn't tell by the 9 letter ticker symbol ;-) . Also let's assume that a high quality stock, BANKPLUS, was trading at $100 per share at the same time you made your investment.
Now it's a year later and INETMINUS has plummeted in value so that your portfolio is now worth $5,000. You've decided that enough is enough and sell INETMINUS. So now you have $5,000. You start looking for a better stock which you find in BANKPLUS. However BANKPLUS has also fallen. It's now trading at $50 per share.
At this point, you'd take your $5,000 and create a new AIM portfolio for BANKPLUS. So if you decided on a 50/50 split, you'd invest $2500 in BANKPLUS (i.e. purchase 50 shares) and leave $2500 in cash. You probably wouldn't pretend that you had purchased BANKPLUS one year ago at $100 a share and then updated it today. If that were the case, then anyone starting a new AIM account could look at their prospective stock's price a year ago and "pretend" they purchased it back then.
To summarize, you're really starting your AIM portfolio with whatever your stocks are worth today (and any cash you decide to add). If you pretend you started a year ago, you're, in essence, really starting today with a different initial cash ratio and a different portfolio control adjustment. If we go that route, there are many, many possible theoretical plans we could follow.
My opinion is this: whether your initial investment comes from your pocket or from what's left of a losing investment, really shouldn't matter (tax considerations aside).
There is a concrete example at the Automatic Investor user's group page at automaticinvestor.community.everyone.net under the heading, "Converting an existing portfolio for use with Automatic Investor."
Of course if you think your stock is near its bottom, Tom's idea is the one to follow (just realize that you're introducing some emotion here).
I hope this helps a little and good luck with your decision.
regards,
mark. |
