Q.
Hi Tom,
My name is Daniel. I was given a copy of Robert's AIM book about a year ago and reread it again this weekend. It's really good stuff. Then I found your site, which is such a bonus.
I've been investing a little over a year now. I dollar cost average via DRiPs in 6 stocks and I have a growth plus a Mid-cap Mutual fund. I also have a IRA with 4 stocks. I like stocks because of the control I have over when to realize cap gains and expenses are very low. Plus most mutual funds fail to beat the market anyway. But with AIM, buying on the dips is crucial. As is taking a profit.
I know AIM says that when I add new money (which I would like to do every month) , I use 33 or %50% (or your value) for cash and the rest for stock, but when do I buy the new shares? Do I wait for a buy signal or can I do it in between the buy and sell range?
Since I'm just 31, I am a long term investor. So if I can feed money to AIM on a monthy basis, why sell and realize a capital gains, then wait for 20% drop before I can buy more. How likely is this? I could up the SAFE for sells I guess.
Thanks for you web site. I just knew there was one out there!
Daniel
A.
Hi Daniel,
It sounds like you are off to a good start with investing and AIM. I think I'd suggest two separate accounts for your activities, however. First, for all new money being added, start a TWINVEST (chapt. 15?) account. It's perfect for periodic additions like you're doing now. You build an equity position at the same time you are building a cash reserve. Tvest is very easy and efficient and takes no time at all. Once you've accumulated about $10,000 in the new Twinvest account, then unplug t-vest and start up AIM. If you continue to make contributions, start a new t-vest account with a new stock or fund.
Second, if you have enough total value accumulated in the existing stock and mutual fund accounts, then use AIM on them. For a mutual fund account you can get on with $5000 to $10,000 total value including cash reserve for an active AIM account. For stocks, it's a bit of a problem when share prices are high and your total number of shares is small. I'd suggest that individual stock accounts have a minimum of 500 shares in them. If you have a mixed bag of stocks and none of them large enough to make a single AIM account, then separate them by industry, or other catagory and make 'baskets' of stocks. Trade each basket as a separate AIM account. You don't want to mix utility stocks with biotechs, however! Try to mix them in groups that move together, and then when AIM tells you to unload $1000 of equity, you get to choose which one!
Cash is Buying Power in AIM. Let it accumulate by selling as AIM suggests - BUT, don't let it get to be too large a portion of the portfolio. If the stock has had drops of 50% from previous highs, it needs to have 50% cash reserve at the market tops. If, like a utility, it has never dropped much more than 25%, then chances are you will never need more cash that that. This holds true of mutual funds as well. If the fund shows no drop of more than 30%, then use that as the cap of the cash reserve. Then stop selling and use my method of reverse buying, now referred to as a "vealie". Instead of selling the amount AIM suggests, you take half of the value of the market order and ADD it to Portfolio Control. This negates the sell order and lets the risk expand a bit. After this has been done a few times in a row, the cash reserve will have dropped in percentage to a lower level of the total. Once it's dropped 10% of your upper limit (5% if the top is 50%) then you start to sell again. You keep repeating this process in a long upwardly trending market and thereby improve your overall return beyond Mr. L's original AIM.
'Reverse buying' is probably the best way to keep the capital gain tax to a minimum and still stay within the AIM envelope. Mr. L's AIM didn't have a ceiling on Cash Reserve. The original AIM just kept selling forever. There's no reason to let the cash reserve rise to 80% of the account if the stock never displays a drop of more than 40%. You'll never use all the cash, so therefore it's a drag on the portf. performance.
Hope this helps,
Tom |
