Q..... SAFE settings, Cash Reserves, Mutual Fund Distributions, "vealies", etc.
Hi Tom,
I just discovered the AIM system and your web site, and I am impressed with them both. I found Lichello's book on the internet for .97 (yes, 97 cents!), so I bought it and have started reading it. I plan on implementing the AIM system ASAP, but I have a couple of questions for you.
I have several mutual fund retirement accounts that I plan on AIMing right away. The main question is, what should I use for the starting SAFE numbers? I will start them both with the Idiot wave cash recommendations, so I will have the proper equity/cash ratio from the start. I have 2 funds that are fairly volatile (PRSCX and PRNHX), and one fairly mild account (STCSX). Also, is it correct that 5% is the recommended minimum trade amount? These are all retirement accounts, so taxes are not a factor. Does that change the strategy at all?
If I am understanding "Vealies" correctly, since I will be starting with the IW recommended cash, then if my account triggers a sell fairly quickly, do I "pull a vealie" right away? If I'm reading it right, cash shouldn't go more than 10% over the IW recommendation. Is this correct?
I understand the buy/sell features of individual stocks using this system (just enter limit orders and wait for them to hit), but how does it work with mutual funds? When you get a buy or sell signal, you will have to use the next day's price, which could be significantly higher or lower (possibly enough that it would have cancelled the buy or sell), but you don't know the closing price before you have to commit to making the buy/sell decision. How is this handled?
How do you record mutual fund distributions in this system? I haven't looked into it too much, but when year end distributions are made the # of shares increases and the price per share decreases, sometimes by a large amount. I haven't run the numbers, but does this affect the system at all?
How often do you update the investments - once a week? I thought I read that but I don't remember. And what day do you update the IW recommendations? That could make a difference on whether to pull a vealie or not, so it would be helpful to know.
My apologies if you have answered all these questions before. I haven't made it all the way through the bulletin boards yet! :-)
On your early bulletin board messages you asked how people found this site. I found it totally by chance. I typed "value line investment survey" into yahoo, and this came up on one of the descriptions on the 2nd or 3rd page. I checked it out and have been very interested ever since.
Thanks for your help - I look forward to hearing from you if you have the time.
Jeff
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A........
Hi Jeff,
It sounds like you managed to get off to a good start by keeping your expenses under control on Mr. Lichello's book! Congratulations. I'm very pleased with your letter and the thought and time you have already put into what to do about starting up AIM as manager of your retirement accounts.
I'll see if I can answer them pretty much in order.
It appears that all three funds should do well with AIM's guidance over time. Because of the unusual circumstances of the current markets you should get maybe more activity than during more normal (if there really is such a thing) markets. All three funds have rather different personalities and therefore should be treated somewhat differently.
1) PRSCX - The TRP Science Fund is by far the most volatile. I don't see any way to handle it gracefully other than to treat it more like an individual stock. It should carry the full Idiot Wave Cash Reserve for individual
stocks, ie 30% Cash right now for starting. I'd further suggest that you keep the total SAFE value set at 20%. This can be set up as 10% for each buying and selling, or if you want to be more cautious for now, the full 20% on the Buy side and zero on the Sell. This would help you conserve the Cash Reserve should the market head lower.
2) PRNHX - TRP New Horizons is a bit more mild, but still has some usable volatility. Here I believe you will be fine with the lower IW Cash Reserve level of 20% which is for diversified mutual funds (sector funds really act more like individual stocks). A quick look at a 5 year chart shows that a total SAFE value of about 15% would work well. I'd suggest 10% Buy SAFE and just 5% on the Sell side for now.
3) STCSX - Strong's fund as you indicated is the mildest of the group but still exhibits solid drops periodically that would trigger AIM's buying. Here I'd stick with the IW Fund cash reserve value and just 10% SAFE, all of it on the Buy side.
Yes, Mr. Lichello suggests you use 5% of the equity value as a minimum order for trading. So, if you had $8000 invested, then you could use $400 as your minimum trade as long as the fund family is okay with that size order.
Many AIMers use 5% of the Portfolio Control value just to keep life simple. Then it doesn't change except when a purchase is made and doesn't matter if the market price/share is rising or falling. Being a tax exempt trade does allow you to make smaller transactions with no additional headache of tax paperwork. So, if your retirement account is huge and you don't mind the extra effort, you can make smaller minimum trades if you like.
Your understanding of the "vealie" is correct. Let's say you start with just 20% Cash Reserve in your Strong account and it rises to the point you are triggering your first AIM trade. Let's also assume you are using zero for your Sell SAFE and a 5% minimum trade size. Then AIM will be asking you to sell 5% of your holding when the price hits about $18.60. At that point your cash reserve will have stayed the same value but will be slightly smaller as a percent of total value - about 19%. Assuming the IW is still suggesting 20%, you could either sell or pull a 'vealie.' You really can let the Cash Reserve slip to 18% (10% less than the IW's suggestion) if you want before executing your first sale. That sale will bring the Cash Reserve back up a bit.
In practice, 'vealies' and sales will alternate with one or two of each followed by one or two of the other. That somewhat depends upon price movements. Obviously if there's a buy along the way, that will reduce your cash reserve enough that 'vealies' won't happen until several sells occur. Also remember that when you do a 'vealie' you are only adding half the value of the proposed Sell Market Order to Portfolio Control.
Trading with mutual funds is a bit less precise than with individual stocks. This is because of the "end of day" pricing of most mutual funds. Here's some different ways of handling this:
1) - You update your AIM accounts for this period and find you are to sell 5% of your STCSX at $18.60 (today's closing price). Tomorrow you take a look at the market at 1PM and see that the DOW and NASDAQ are both down for the day by over 1%. Delay the Sale until you see an up-tick in the market that pretty much assures you that you will get at least $18.60 for your shares.
2) - You update your AIM accounts for this period and find you are to sell 5% of your STCSX at $18.60 (today's closing price). Tomorrow you look at the market and find the DOW and NASDAQ are both up 1% at 1PM so you go ahead and call in your orders. Chances are the market will still be up at the end of trading and you will get that day's close and a price that's $18.60 or better.
3) - You update your AIM accounts for this period and find you are to sell 5% of your STCSX at $18.60 (today's closing price). Tomorrow execute the trade no matter which way the market goes! :-)
Obviously #3 is the easiest. It also won't make a large difference on an annual basis which way you do it. Which ever fits your life style is most important. Each has it's strengths and weaknesses. You can use the mirror image for Buying, ie attempting to insure that you buy at a price at or below whatever AIM suggests for your trade. You will report the results to AIM as they happen. AIM doesn't care and will compensate in the next order. In other words, if you buy a few more shares or sell a few less because the price moves in your favor, AIM will compensate in the next round of buy/sell recommendations. It all works out in the end.
Mutual fund distributions are easily handled with AIM and with the various software products that I've tried. Take the distributions in SHARES. First you tell AIM there's more shares in the system and then tell it the new adjusted price/share. The total value will work out to essentially the same. No change to Portfolio Control is needed. If you were to take the PC value in CASH then you'd have to reduce the PC values by the same exact amount of the cash distribution.
The software I use (Newport) requests that I update the prices of the equities once a week. This is to facilitate creation of its histograms. However, you don't need to or should you even expect (especially with mutual funds) to actually be trading as often as weekly. I post my Idiot Wave data once a week and usually I try to get the report written by Tuesday of each week. This doesn't always happen, but it's my goal. It takes a very unusual market to move the IW value more than one point in a week. So, you won't be too far off the mark even if you should make your trade without the IW's latest value.
Thanks for the additional info on how you found the AIM site. Had you already read Mr. Lichello's book, or were you introduced to AIM by your Search?
Best regards, Tom |
