With AIM there always seems to be a question as to what is a good minimum size order to use. I've fiddled with this problem over the years and here's some thoughts on the subject.
I try to keep commissions as low as possible. It's one of the only
controllable costs we have in this business. With deep discount brokerages around, it's much easier than when I started 11 years ago. My old rule of thumb was to keep commissions under 5%. So, if you paid $25 per "round trip" (a buy and sell cost of $12.50 each), then you could set your minimum trade size at $500 and still be pretty good.
Taxes are an unavoidable expense and aren't really controllable. They're just cost of doing business. If you are using FIFO accounting with your stocks, it's possible with AIM to be selling at a FIFO loss making a handsome LIFO gain. It's not so much where we sell with AIM, but whether we allow a large enough gap downward to our next buy price and enough gap upward to make a good LIFO profit. If we sell 50 shares and set up AIM's SAFE and minimums to buy back too soon, the NET amount from the previous sale may not buy back all 50 shares! That means that we're trading for Uncle Sam's and the broker's benefit, but not our own. This is defined as"churning."
Mr. Lichello's comments on the subject are rather limited. He suggests that we trade nothing less than 5% of the equity side of our portfolios just to simplify life. His methods (a full 10% SAFE on both buys and sells) pretty much guarantees that you'll buy at a minimum discount of 20% from your last Sell. It's usually larger than this just because we usually won't trade really tiny orders. It also almost guarantees a profitable experience.
In rough numbers, if you trade $500 size orders, always turn 30% LIFO gains, pay a total commission (in and out) of $25 ($12.50 each way) and own the stock long enough that your tax basis is long term on a FIFO basis, you will NET about $100 for that trade.
$500 Gross from sale
-350 Cost of stock
-25 Commissions Total
=$125 Gross Profit
-25 Fed Tax (figured at 20%)
=$100 Net Profit
Amount to reinvest? $450. Cost to reinvest? Another $12.50 commission. Net to reinvest? $437.50. So, you don't want to invest until the price has fallen AT LEAST 12.5% (437.50/500). So, if it sold for $10/share, you want to start thinking of buying back the same number of shares at $8-3/4. To turn 30% LIFO again means that we'd set our next Sell order for about $11-3/8 for the same number of shares. (This is also completely true for Short Term Traders that trade all their shares as it is for AIM traders.)
If it takes you one hour to track the AIM account, make the trades,
calculate the taxes and get them paid, then you've paid yourself $100/hour for your efforts. Not a bad pay scale for starters! If you trade smaller amounts, it still takes you the same amount of time to do all the work. So, your "hourly pay rate" goes down. If you make larger trades, then the pay scale goes up on an hourly basis.
The trick comes in balancing the frequency of trading with the "Hourly Pay!" If we trade more frequently for less profit, we can conceive of a larger total return on an annual basis even if we're paying ourselves less on an hourly basis. However, there's a point of diminishing return. There's also the workload involved.
Hope this helps more than it confuses!,
Tom |
