Replies to post #147 on AIM UK

[ls7550]

Comparing the UK and US dividend yields over the same extended late 1800's to present period reveals some pretty close similarities.

Accordingly I've changed the iBox Ladder to reflect the combined averages, so it should work reasonably well with both the UK FT100 and the US S&P500. I've calculated the levels based on the collective average when using average, mode, median and 1.28 standard deviation based calculations (80% of the Bell curve falls under +/- 1.28 standard deviations, so the more extreme top and bottom 10% of high/low yields fall outside of the Ladders span).

I've levelled the steps based on a $100,000 investment being allocated such that each 'step' occurs at a 5% proportional distance.

Such that a $5725 addition (higher yield) or reduction (lower yield) at each step level would generate a $286.24 step cycle (up/down or down/up type pair) profit (i.e. $286.24 = $5725 traded over a 5% price range).

Typically over time such 5% step cycles occur 6 times p.a., so in concept after $25 round trip trade costs that's a 6 x $261 average net profit ($1566) relative to the $100,000 allocation, or 1.57% of the total fund volatility capture benefit (2.6% relative to the funds at-risk).

The longer term mean yield aligns with an indicated 60/40 stock/cash average blend, which is generally accepted as a reasonable stock/cash (bond) blend.

In concept therefore if stocks average 10% and cash 4.5% then the Ladder might be expected to average 0.6(10) + 0.4(4.5) + 1.57 = 9.37%.

Where however, as I do, the cash is allocated to alternative investments that generate 8.7% as per the stop-loss based style I use, then the expectancy rises to

0.6(10) + 0.4(8.7) + 1.57 = 11.05%

As the stop-loss style I use typically averages 50/50 stock/cash exposure, an alternative way to look at this combined Ladder and Stop-Loss style is as a 80/20 average stock/cash blend that's uplifted by the 1.57% volatility capture benefit

0.8(10) + 0.2(4.5) + 1.57 = 10.47%

Either way there would appear to be a pacing of buy-and-hold after allowing for some costs, whilst doing so in a more timely and dynamic manner that should generally lower overall volatility (risk).

The greatest benefit is that of mainly being out of the market at low yield points - which have often pre-cursored large declines (and over which times the stop-loss style typically get's us out of stocks quickly and in a low-drawdown like manner).

With current yields around 5.1% the updated ladder is indicating around 35% cash reserves.

Clive.