A.I.M. Users Bulletin Board

[ls7550]

So what to do with the impending deflation followed by subsequent hyper inflation scenario?

If we get away with a Japan like lost decade event we'll be doing well, after all they encountered their crisis when the rest of the world were still in a boom.

Since re-instating 2x exposure I've set my top and bottom Ladder price levels something along the lines of

http://www.jfholdings.pwp.blueyonder.co.uk/Ladderproportionalstep.htm

so at present price levels its around 75% stock exposed.

Leverage doesn't kick in until another 22.5% price decline from present levels (and even then only just starts employing 2X exposure).

Would take around another 77% decline to reach 100% exposure to 2X.

I apply the 'cash' reserves to the stop-loss style I've previously outlined, which typically averages 50/50 stock/cash but does so in a tight downside loss limiting manner.

If you pull down daily prices for the Index/fund you follow and measure the number of up/down x% moves that occur over time you'll find that 5% paired steps (up/down or down/up pairs) occur around 6 times p.a. on average. The d'Alembert amount in the calculator shows how much you make per cycle so you can estimate likely volatility capture gains for a particular choice of settings.

Generally the same volatility capture holds no matter what choice of step size you use (within limits). Larger steps e.g. 30% are encountered less frequently, but make a larger d'Alembert gain amount. Overall the choice of step size doesn't matter that much excepting that small step size trades incur more brokerage fees. On a gross basis the two (smaller gains/frequently vs larger gains/less frequently) tend to be near identical overall.

Typically you'll achieve around a 1% volatility capture benefit using the calculators default values.

Supplemented with perhaps 4% income benefit and that can be a reasonable regular 5% p.a. return from income and volatility capture alone.

When prices rebound then you'll also capture a proportion of those capital gains.

I personally prefer the Ladder over conventional AIM as I get to see the bottom price level at which cash reserves are exhausted more clearly.

I've opted for such deep downside cover as potentially we might see further price declines in reflection of high inflation and interest rates after the current depression issues stabalise to some extent. The default Ladder calculator settings should help avoid breaching into dry areas (all-in or all-out type conditions). The settings are also tuned to levels at which I feel comfortable entering into 2X and the minimum amount of funds that remain constantly equity exposed etc.

If you save the HTML from that calculator web page to your local hard disk then you can tweak the code to match your own choice of index/settings.

I'm tempted to go a little overweight holes in the ground (oil) and energy ETF's for their greater resilience to inflation (nice to hold a bit of whatever base material that appreciates in price with inflation whilst costing zero to store (just dig/pipe it up as required)).

Tom did quite well with Energy IYE before switching out into a new set of holdings. He timed that entry and exit well and prices have subsequently declined quite a bit. Might be approaching a reasonable time to get back towards overweighting that sector.

Best. Clive.