Preface: John has brought up an idea that should help many of you that are contributing to 401's and IRA's from earned income. This idea uses the AIM model as a "trigger" for asset allocation.
Q.
Tom,
I have e-mailed you some other questions previously, but here is another
one. I was thinking through a way to make AIM even more powerful the
most risky AIM investor like myself. I wanted to see what you thought
about these modifications and if they may work or if they would screw up
Lichello's formula too much.
Proposal: In an effort to benefit from the ups and downs even more I was
wondering if I could simulate the 1/3 cash that I have. Upon an initial
investment an investor could split his/her lump sum into 2/3 and 1/3 and
then determine what the sell/buy resistances are for this setup. Once
this is done let's say that the buy resistance will come to about $500
each buy. I would propose that the investor keep a minimum of two buys
in cash prepared to do just that (this could be argued). Then with the
remaining cash left, invest it in the fund ADDing to it not BUYing.
This would increase the simulated cash and increase the amount of stock
by the appropriate 3rds. I would do this on my first AIM driven buy,
buying what AIM says and adding the remainder. A person already
invested using AIM could do the same and just wait until the first low
to buy getting rid of the excess cash by again adding it. Meanwhile,
because I need to be investing monthly, I would put cash into my cash
reserve on a monthly basis and AIM driven selling would do the same.
Each time AIM says buy, again I buy whatever it recommends and add the
remaining cash to the investment that time or the next buy if I want to.
This would still use all the modifications that you and Mr. Lichello
have made too.
Based on only averaging about two buys/sells per year this would take
advantage of those even more. If I am putting cash into my reserve each
month I would be helping to get it back up for the extremely lean time
when buys come often.
If you have any questions please let me know. I think this might be
worthwhile for people like me, but I am interested to see if you think
may be completely off base here. Thanks for checking this out. I look
forward to hearing from you.
John
A.
Hi John,
Good to hear from you again. It looks like you have been spending some serious time thinking about Mr. Lichello's model. In general, almost anything you want to try that follows Mr. L's basic Buy Low, Sell High ideas will probably be to your benefit.
Your idea of souping up your ongoing "thrift plan" by using AIM as the purchasing guide instead of DCA or TWINVEST is a good one. I've thought about similar ideas for the person that's still earning an income, but never formalized it. The idea was to start with a lean cash reserve and fund the reserve from earned income.
Your concept of keeping a couple of AIM Buys in reserve as the cash content of your AIM account is good. Then you can do some AIM directed buying even before your next contribution. Letting the cash reserve accumulate as ADDs in the TRADE window is a good idea, too.
If I understand you correctly, you would then use AIM to trigger selling at the appropriate times as well as buying. However, you would only BUY as much as AIM asked, but then further deplete your Cash Reserve with one big ADD of shares with a DEDUCT of CASH. I assume that you would leave the "Two AIM Purchases" minimum in the cash reserve to allow for more AIM buys before your next contribution to the account.
If the market were to rise for a very long time, you would be accumulating lots of cash, potentially. In that case, please use "vealies" to keep the Portfolio Control in line with the overall portfolio. Actually, since you are going through periodic reductions of the cash, this shouldn't happen too often.
The market in recent years seems to be on an almost perpetual rise. This has been beyond the concept of what Mr. Lichello expected back in 1977. AIM "By the book" would have raised so much cash in most mutual fund accounts that only the end of the world would have used it up completely! I think you've added one more great idea to the overall scheme. Thank you. If you don't mind, I'd like to add it to the Question and Answer page.
Best regards, Tom |
