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Re: Scoring vs market risk
Hi Tom -
I've noticed the same thing about the relative difficulty of "calling the top" in testing I've done in the past. (That's one reason I'm fascinated with AIM-CASH ; its high values seem to be followed by more frequent low - or even negative - returns.)
Your idea of filtering out noise (i.e., excursions past a critical value that immediately revert into the mid-range) is something I'd tried before, but I haven't included it this time 'round. I'll take a look at adding it. Did you do your analysis in a spreadsheet? (I'm pretty comfortable with that type of tool, but a clumsy and reluctant novice coder at best, so it's usually spreadsheets for me.) I could add in a consecutive-weeks counter and filter out values below some threshold ; that's what I've done previously... Do you recall if that's more or less what you did, or have any pointers? I'm always open to a better approach. 😇
(As an example, adding a counter, taking its average over the most recent three weeks, and filtering out values below .66, would flag sequences that bounce back and forth between mid-range and high over several weeks : Mid - Mid - High - Mid - High - ... High - Mid - Mid ... would raise a flag on the second High and lower it on the second trailing Mid. Crude, but probably worth a shot.
Also, about AIM-CASH being a monthly-frequency measure. I'll recap this when I post about its performance, but the cereal-boxtop version is that I set up a weekly-frequency version of it in order to compare more directly with the VWave values. The only change needed was to use weekly "market price" values instead of monthly ones in order to calculate AIM-CASH weekly.
With kind regards,
-- MakeItJake
Hi Jake, Re: Scoring the v-Wave and AIM-Cash relative to market risk...................
I did a similar study some years ago on the MRI (idiot wave) and created this table. This one has the higher risk events as well as the lower risk ones scored. The MRI was better at calling out low risk events where the excess returns were better using that end of the spectrum. I think this is because Bull Markets can go on far longer than logic would assume. Nobody wants to call the end of the party and turn out the lights. Here's how they looked when I compiled them. They're not up-to-date, but should serve as a guide. (last updated through 2020)
There were 16 high risk events between 1982 and 2000. A total of 18 low risk events were signaled over that same period of time. The % Success column represents the rate at which the "call" of high or low risk was correct out of all the signals given. I also recorded the length of the "signal events" in weeks and they varied from as short as two weeks to as long as 24 consecutive weeks. One week signals I ignored as "noise." The MRI data is weekly in nature. I took the elapse time in weeks after the first signal and measured the change in the NASDAQ Composite and compared it to the long term average over time for those intervals.
I hope this helps in analyzing the the v-Wave info. I've never done a similar study for the Value Line info. Also, the VL data is collected 'weekly' where I think the AIM-Cash data was monthly. That might help explain the mis-alignment to some extent. I look forward to your analysis. I'm going to hazard a guess that the low risk data will also be favorable for the v-Wave in signaling better returns. When mapping both the MRI and v-Wave they tend to move in the same directions at the same times. Duration of the signals might vary as well as the start dates. The MRI always seemed a bit more reactive.
Best wishes,
OAG Tom
VWave and AIM-CASH: Checking the high values (2)
Some notes on the stock data and the forward return measures, and please be forewarned that this part may be pretty dull :
The stock price data came from Yahoo’s historical data for the S&P 500 (^SPX). Instead of using close prices, though, I took the average of each day’s high, low, and close, and then took a weekly average of those daily values to arrive at a value that would represent “the market price” that week.
I divided each week’s market price by the CPI value using data from FRED, to adjust for inflation. (The CPI value for a given month isn’t released until midway through the next one ; following Clive’s lead I used the preceding month’s CPI.)
Then I set up forward returns for 26, 39, 52, 78, and 104 week holding periods – so, as an example, for the week of 1982-01-08, the market price value was 1.28, and the market price value 26 weeks later was 1.11. I divided 1.11 by 1.28, and then annualized the result to 0.752.
(The returns are in multiplier form, so 0.752 represents a 24.8% loss. 1.752 would be an 75.2% gain, and wouldn't that be nice!)
This table shows several measures for the entire set of returns from 1982 forward. These will be the baseline for comparison. Any given week might differ (maybe a lot!) from these values, but overall, this is more or less what would be expected if we looked at a randomly-selected group of weeks ; they’d approximate the averages shown here.
A quick note before defining these measures : Think about a randomly-selected group of weeks. If the VWave or AIM-CASH values are meaningless – some sort of mathematical noise in which think we can see patterns but it’s just because we wished for them really hard – then selecting groups of weeks on the basis of high VWave or AIM-CASH values wouldn't be too different from selecting them by rolling dice or some such deliberately random method, and their measures should be expected to look a lot like the ones above.
The measures themselves are probably pretty self-explanatory, but just to be sure : Taking the 52W column as an example –
Count : How many 52 week returns were in this group (in this case, overall). (The counts are different for different holding periods because for more recent weeks, the future price values don’t exist yet.)
Win rate : The percentage of weeks for which, 52 weeks later, the S&P 500 prices were the same or higher. Overall, these baseline odds were about 3 to 1 (74%).
Mean CAGR : The average annualized return (CAGR = compound annual growth rate). For the 52-week holding period, this was 1.076 (or 7.6%).
Mean win (or mean loss) : The mean annualized return for only those weeks that showed a gain (or loss). The mean return for just the weeks whose 52-week returns broke even or were positive was 1.148 (or 14.8%), and the mean loss for just the weeks that lost was 0.869 (a loss of 13.1%).
Again, a lot (maybe all) of that is self-explanatory. When my niece started kindergarten, she already knew the alphabet and could read a bit, and was familiar with simple addition and subtraction problems, and after the first week or two she asked her parents in some frustration, “why are they telling us what we already know?” If your own reaction is along those lines, my apologies. But this seems like a good place to break off for now.
Molata!
Some corrections, since I missed the edit window...
(Does anyone else have a talent for reading, re-reading, and still missing errors? I do this with superlative consistency, and it's a shame I can't make the same brag for various other parts of my life.)
"high VWave values did correspond to lower prices later" -- well, no ; generally that's just not true. I wasn't looking at price levels, I was looking at returns. High VWave levels corresponded to lower than average returns, not lower prices per se, in the following weeks.
"High AIM-CASH values also corresponded to lower prices later." Nope ; same error. Now, in some cases, the lower than average returns did come about due to lower price levels, but that's not what I meant to think, or say. Think returns, not prices as such.
I think that's it, other than misspelling "quick-and-dirty," which probably bothers me far out of proportion to its actual importance. But the other issues are consequential and if anyone reads that first post with care, they'd probably be somewhat misled. If that's you ... my apologies.
VWave and AIM-CASH: Checking the high values (1)
I’m going to put up a short series of posts looking at how well high VWave and AIM-CASH values mark high risk, and link them by setting each new one as a reply to the previous one. This first one just gives a high-level view.
I won’t go into the history of the VWave here except to say that it’s yet another innovation to the credit of a certain Mr. Veale, who has done so much to carry forward and extend AIM. He developed it “to monitor ongoing market risk and give a feel for what the near-term future held for AIM investors.”
The point I want to focus on is that VWave values above 51 mark a “High risk” zone for individual stocks.
Having a marker for high-risk periods for stocks is useful to me not only for setting the cash level of a new AIM portfolio but for deciding whether to use a Vealie when AIM advises a sale, to counteract AIM’s tendency to build up cash through successive sales. It makes sense to hold onto stock when there’s already sufficient cash in the portfolio. But if we’re in a high-risk period and I think the stock price will stay flat or fall, then I might do better to transact sales ; I’ll want that additional cash later. If I think prices will fall, not simply stay flat, I might also want to put off adding cash (and buying more shares) in an existing AIM portfolio or starting a new AIM machine.
So it made sense to me to check how well the VWave values flag high-risk periods, by evaluating how stock prices changed over the following weeks or months. Ideally, in high-risk periods stock prices would be more likely to fall over the following weeks or months, or at least underperform compared to their overall average track record. I also evaluated price changes following high AIM-CASH values for the same time period, since I've been fascinated with Clive's work and my early quck-and-dirty assessment was that it holds a great deal of value. The holding periods I looked at were 26, 39, 52, 78, and 104 weeks.
Here’s the TL;DR :
In weekly data from 1982 forward, high VWave values did correspond to lower prices later, though not as clearly or sharply as might be hoped. Returns were somewhat lower than average, mostly because the win rate was also somewhat lower. Offsetting that, the losses that occurred were actually smaller than average.
High AIM-CASH values also corresponded to lower prices later. Returns were further below average, brought about mostly by a much lower win rate and losses that were larger than average.
Clearly high VWave values and high AIM-CASH values occurred in different sets of weeks. That’s not surprising ; although we don’t know exactly what goes into the VL data which underlies the VWave, VL has described it as a projection of future price levels, while the AIM-CASH values assess current (inflation-adjusted) price levels. I thought it might be interesting to look at the two together.
The high VWave weeks and high AIM-CASH weeks partly overlap – for instance, some (but not all) mid-range VWave weeks had mid-range AIM-CASH values, and vice versa. But a small number of weeks overlapped in having high values for both the VWave and AIM-CASH, and the returns for those weeks diverged sharply from the trend of high values lining up with lower subsequent returns :
When the VWave values and the AIM-CASH values were both high, returns were (unexpectedly) higher than average across most holding periods, with unusually high win rates.
That seems like a good stopping-point for now. As a friend of mine often says, "Molata!"
v-WAVE 3.0*
Suggested Starting Cash Value For New AIM Accounts/Positions
Individual Stocks
High Risk: At or above 51%
Neutral: Between 37 and 50%
Low Risk: At or below 36%
Diversified Funds
High Risk: At or above 34%
Neutral: Between 25 and 33%
Low Risk: At or below 24%
_________________________
Week of September 27th
_________________________
Short Term (18 Months)
Individual Stocks: 62% (Up 2 from previous week)
Diversified Mutual Funds or Portfolio: 41% (Up 1 from previous week)
__________________________
Long Term (3-5 Years)
Individual Stocks: 50% (Up 1 from previous week)
Diversified Mutual Funds
or Portfolio: 34% (Up 1 from previous week)
Oscillator: 1.71 (Up 1.27 from previous week)
*See posts #44585 and #44588
The 50 basis point "Happy Pill" seems to have made the markets happy this AM.
I wonder how long it will be before it wears off.........
Best wishes,
OAG
Hi Adam, Re: Black Swan Rule......................
I think I first used this idea back during the 2008-09 Financial Crisis. There are times when we do run out of cash in our AIM accounts. The price/share can then move downward or maybe our AIM buying has been solid and the price just seems to stall at that low level. That's never fun when we're AIMing for profits.
The idea is to use our lowest buy price as the base for "black swan" trading. We take that price and divide it by 0.80. That will give us the price target at which we will willingly sell our minimum share allotment. This price may be significantly below what AIM would like for our target. That's okay as AIM will adjust accordingly. It will also be a profitable trade based upon our lowest/last buy price (approx +20% profit).
If/When we get a Sale at that price, we then revert to AIM's next target after that trade is entered. Should the stock price again cycle downward, we'll re-use the last Buy trade price as our buy target. If/When the price drops to trigger that black swan buy, we'll again buy the shares back. We'll again use the 0.80 divisor which should give us a target very close to the previous Black Swan selling price. Rinse, Repeat.
While the stock price is bouncing and bottoming we'll possibly be able to capture some profits with those moves even if the price/share doesn't reach AIM's target for selling. As stated, once the first sale has occurred, we switch AIM back on and use its suggested next sell target price. Once we've worked AIM out of being cash strapped, we just follow AIM's target prices again.
Hope you don't have to use it, but it's nice to have a plan!
Best wishes,
OAG Tom
Hi Adam - I'd made a note of the post I think you mean. The one I'm thinking of is here...
Hi Tom, Would you mind reposting your "Black Swan Rule" for dealing with a stock that has dropped and depleted its cash supply?
Thanks
Adam
"It was intended as a suggested starting point "
Hi Toof - you may be right about the VWave. I do seem to recall that it has also been put forward as a way to target the cash level, though. But if I'm remembering it wrong, well, I'm ancient enough to claim the privileges appertaining thereto 😆 ... just ask my knees!
It doesn't matter to me, though. I've been comfortable using it as a suggestion for the cash percentage at any given time, because I've set up tests against forward returns for various holding periods, and confirmed that when the VWave is low, the returns to the following months are relatively high (on average).
The problem I have with using the VWave this way is that it's a useful tool at the low end, but its signal seems to break up at the high end, so to speak.
More on this in a bit.
But if that isn't the way you want to use the VWave, and it sounds like it's not, and if what you're doing is working for you, and it sounds like it is, why would you change? I'm not here to preach ; all I want to do is add a bit of information. Use it how you will.
v-WAVE 3.0*
Suggested Starting Cash Value For New AIM Accounts/Positions
Individual Stocks
High Risk: At or above 51%
Neutral: Between 37 and 50%
Low Risk: At or below 36%
Diversified Funds
High Risk: At or above 34%
Neutral: Between 25 and 33%
Low Risk: At or below 24%
_________________________
Week of September 20th
_________________________
Short Term (18 Months)
Individual Stocks: 60% (Down 7 from previous week)
Diversified Mutual Funds or Portfolio: 40% (Down 5 from previous week)
__________________________
Long Term (3-5 Years)
Individual Stocks: 49% (Down 1 from previous week)
Diversified Mutual Funds
or Portfolio: 33% (Down 1 from previous week)
Oscillator: .44 (Down 1.44 from previous week)
*See posts #44585 and #44588
Re: the validity of the V wave.
It was intended as a suggested starting point for new accounts, not as a target cash level.
If you wanted to do that you could just not bother with the portfolio control and just rebalance the account periodically based on the V wave !
Toofuzzy
Good day Clive, Re: Naming Error.................
Sorry for that, I meant Talmud, but had Permanent Portfolio on the brain, I guess!
It certainly seems to help reduce sleepless nights.
Best wishes,
Tom
Hi Tom.
The Permanent Portfolio is different, 25% each stocks/LTT/cash/gold
Land or home or REIT, stocks, gold ... thirds each is the Talmud style, my personal preferred choice.
Consider 'stocks' as a simplified form of buying a farm and working the land - that yield dividends. Own a home and you don't have to find/pay rent to others, has imputed rent benefit. REIT are similar, but where someone else manages buying and renting. Gold is more like just buying land and leaving it idle. Three fields if you like, two being sown/harvested, another being left fallow to enrich the soil (perhaps where you bury your gold, but then rotate the fields yearly - move the gold into the next field).
Stocks and REIT are similar in many ways, somewhat move aligned, but differ. Different crops in different fields, both generally productive. A farmer with a constant fallow field loses less in a bad harvest year - tends to recover quicker from over-worked (extended) poor soil situations, rises less in good/great harvest years.
Definition of a farmer - a man outstanding in his own field :)
The farmer that pushes hard each/every year, over-working all his fields, maybe concentrating into a single crop (stocks) will at times pull ahead, but then slam into one or more seasons of regret, bad harvests. The one field fallow rotation farmer is more inclined to see more steady/consistent harvests. Broadly perhaps similar overall total returns, but where when the rewards are the same/similar the one with the more consistent productivity (lower standard deviation/variance) is generally considered to be the better risk-adjusted reward.
Individual fields (assets)
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=4B9fCOE4SlfQsvwH6ynvwK
Comparing all-stock to thirds each stock/REIT/gold
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=4Ym8nrenMmtH6sF1DwrIPS
If you own your own home, don't have to find/pay rent for shelter, and additionally have around twice that home value again split equally between stocks and gold, then you're diversified across multiples currencies, both fiat and non-fiat, and multiple sources of income, imputed rent, dividends, SWR (withdrawals), and have two thirds of your wealth in-hand, no counter-party risks (land and gold).
Rebalancing wise and 'spending' the imputed rent, and spending the stock dividends, and drawing some from either stocks or gold - whichever is the higher value of the two at the time ... can be enough, partial rebalancing via directed withdrawals. That can extend out 10 or even 20+ years without too much 'drift' in the asset weightings. If/when a big drift is apparent however then especially if either due to stocks or gold having risen a lot then again partial rebalancing (ignoring your home value unless a move of home is considered reasonable/appropriate) - resetting stocks and gold to 50/50 weights is a appropriate choice/action. If say gold was twice the stocks value or vice-versa.
Clive
Thanks Clive for the further look-see,
I've also been circling back to your thoughts on permanent portfolio. Some years ago I suggested to a friend the general concept and was asked to create something in that nature. What I chose was VNQ (real estate) VUG (growth stocks) and IAU (gold surrogate). Further, after looking at longer histories of these three it appeared that rebalancing the three over time would build a nice, low worry long term portfolio.
I set up some "drift" values for them that would trigger rebalances rather than using a calendar date. This requires a bit more attention and effort on the part of the user but seemed to look worthwhile. But, I found one thing I didn't appreciate. Sometimes the rebalancing occurred when all three were "up" or "down" but not the same amounts, which then had some internal conflict relative to potential capital gain sales tax. I "solved" this issue by changing the makeup of the portfolio from 33% each to 30% each and holding 10% in money funds. In this way, many of the rebalances could be done with no selling of the over-weight component. The cash reserve was used to fatten the under-weight component(s). All dividends and interest collected in the money fund, so at times it was over 10%. That also served the portfolio management well.
This histogram illustrates how the three components moved over time. Please stretch the X-Axis to the fullest extent (Sept, 2004; 5022 days) to see the various times of divergence and drift.
https://stockcharts.com/freecharts/perf.php?IAU,VUG,VNQ&n=2516&O=011000
Through the financial crisis and all the way to around 2011 the gold portion would have done a nice job of funding purchases of both real estate and growth. From around 2011 through 2016 those two components would have funded a 'restocking' of the gold component. Not much would have occurred except keeping the three components generally at around 30% each with use of the Cash up until Covid (2020). Again gold would have offered to fund rebalancing of the other two components if the money fund wasn't enough to do the job. The growth run-up through 2022 would have mainly repaid gold as it was somewhat flat and real estate was climbing, but at a slower pace. Since the start of 2023, growth would have been funding real estate to a greater degree than gold.
In recent history we've had enough inflation that real estate could again be a sanctuary for investors hoping to avoid further debasement of currency. Maybe that component will be the next HERO to fund the growth side if we see a stock market correction. So far the 30/30/30/10 portfolio has been easy for them to maintain with relatively small capital gain tax burden. Without checking, I think I'd told them to use 5% drift from the model. That meant than any of the three components that drifted from 30% to either 25% or 35% should trigger a rebalance regardless of date. Annually I suggested they tweak the ratios back to the model using mostly the cash reserve to fund the weakest of the three. Cash has floated up to around 15% of total off and on. So, spreading it around to rebalance meant essentially no capital gain tax.
Best wishes,
OAG Tom
Hi Tom
In 2000 I went on margin for a reasonable amount but in 2008 margin rates were higher so didn't do it.
What I have done eventually to give an example.
I sold all my shares of WPM , many at a loss ( let's say 1,000 sh ) at a price of let's say $30
I.then went and bought (10) $15 call leaps for maybe $16 per share.
That freed up $14,000 which I was then able to deploy buying both WPM at new lower prices, or other securities.
Hi Tom
Historic (typically) 30 year SWR measures identifies the individual worst case withdrawal rate period. That individual worst case often follows large/fast gain up-run, euphoria - over-extending share prices and then subsequent realism drop. Think Wall Street Crash 1930's - that followed the "Roaring 20's" when all, including shoe shine boys, were 'experts' at making money from stocks, some/many even massively leveraged stocks (borrowed to buy shares). Japan's 1970/1980's is another example, the rise of Yamaha, Sony ...etc. to global household names, and the subsequent 1990's corrective declines. Dot com bubble 1999 peak, perhaps a AI bubble next. Any method that has you reduce being heavily in at euphoric highs is inclined to improve the SWR outcome. More often the average actual SWR supported is considerably higher than the 4% guideline SWR commonly suggested (for all-stock 3.5%, but many opt for 4% on the assumption that they wont be in the worst case 5%)
I applied another AIM measure, standard AIM (10% SAFE, 5% MTS) but where AIM-CASH is set to zero if/when it transitions to negative (so first AIM Sell after a deep dive has some positive AIM CASH), I also applied a 2% Portfolio Control acceleration for years since 1985 to account for the transition towards stocks retaining more of earnings, paying out less in dividends. I further limited resulted AIM CASH, that otherwise ranged 0% to around 66% to >=20% <=50% i.e. between Robert Lichello's 80/20 AIM-HI and standard AIM 50/50 choices (if <20% then indicate 20%, if >50% indicate 50%). From that AIM that dates back to 1915 I extracted out the 1982 years for which vwave/iwave data is available. As that AIM averaged 36% cash I adjusted both vwave and iwave to also average the same, average cash equalization. For vWave (that is the index form, individual stock form / 1.5) that involved adding +8% to each yearly value. Ditto iwave but where +11% was added. So all three averaged 36% cash across 1982 to 2023 years. Aligning actual portfolio value once/year to those indicated %CASH amounts and it was a close call between each of the three, ranking best to worst ... iWave, vWave, AIM. However the differences between all three might be considered insignificant, in the scale of things too small to be considered potentially nothing other than 'noise' differences.
Fundamentally by providing liquidity (reducing-high) to the greedy, and to the scared (adding-low), mostly its a case of reducing the pain from periodic sizable declines from over-extensions that seems to be the primary driver factor. Consider another case of a target 67/33 stock/gold asset allocation. What might drive 67 stock value to halve to 33 might also drive 33 gold value to double to 67. 67/33 transitions to 33/67 with no capital loss, rebalancing back to 67/33 stock/gold again has you holding twice as many shares after prices/values had halved. That will lag across times when stocks do well, decline less across bad stock times. More widely/broadly tend to largely compare to all-stock overall when measured from average to average points (but could selectively be measured peak-trough or trough-peak if one wanted to make a specific distorted sales-pitch angle).
So a investor might opt to align once/year to the iWave indicated cash at that time, or the vwave, or run AIM, or 67/33 to in effect comparable expectancies. One of those will be the worst, another the best, but I suspect that's more a case of luck than specific individual consistent characteristics. Individual AIM wise I haven't measured actual results as part of that analysis, however I feel that falls into the same category. When you buy (or sell) some shares the prior trend might continue, or reverse, again more a case of luck, trading smaller amounts multiple times/year (averaging) rather than once/year (lump) I suspect broadly washes out overall. Constant weighted, such as 67/33 however is inclined to be the worst of the set. At times 50/50 would have been more appropriate, at other times 80/20, adjusting to align with those levels in reflection of current valuations rather than a constant single weighting choice is likely better than not.
Primarily we're looking at risk-reduction benefits. Maybe similar overall rewards to all-stock in the broad sense, but where SWR risk is lowered (worst case SWR is improved). A factor is that data since the 1980's is across a period that started at significant lows. The 1970's saw large scale losses in stocks and a rise to very high inflation and interest rates, a relative (and significant) low. Starting from a low is inclined to yield good/great subsequent outcome. Presently that's somewhat flipped, recent levels might be considered as being at potential highs (more so given recent prior years of 0% interest rates/inflation). AIM and such-like did OK over that low to high era transition and reasonably might be expected to do better during a high to low period.
Fiat currency is a given. Even under gold standard (gold/silver/copper is money) revisions periodically have to be made as things are never consistently stable. Under the gold standard revisions are short/sharp large single points in time adjustments. Under fiat its more a glide-path situation, interest rates, debasement (printing/spending money), taxes etc. are adjusted towards a smoother glide path objective. It's pretty much a given that a dollar today will buy more than that dollar will buy in 20 years time.
More generally I suspect a reasonable choice might be just to apply the vWave once/year portfolio rebalancing as the least effort choice (iWave/MRI being non-public). Or apply AIM if you so prefer. With AIM that opens up applying separate AIM's to different sectors/indexes that is inclined to further smooth out overall portfolio volatility (potentially further lower SWR risk). Failing that, just opt for something like 67/33 yearly rebalanced. Much of investing is more about reducing mistakes. Many individual investors are attracted in at highs, capitulate after losses/lows, mistakes that can be very costly, end up being worse off than if they'd just deposited their money into a interest paying cash deposit account. Outside of that, adding-when-low/reducing-when-high is the counter side to that, and where even if you just achieve market average rewards that average outcome is typically good.
Clive
Hi Jake, Re: Assessing Market Risk directly vs indirectly....................
AIM does a magnificent job of moderating market risk by selling into market strength (tempering irrational exuberance) and buying into weakness (shopping for bargains) when applied to broad market indexes. Clive's work shows this well with AIM's performance being quite close to Buy and Hold's over multiple investor lifetimes. AIM manages this with far better Return on Capital at Risk (ROCAR).
Further, Clive's work takes into account regular withdrawals for "Living Expenses (SWR)." This is something that Mr. Lichello's examples never attempted to do. For those of us who are still employed, this isn't probably what we're doing, however. For those of us who no longer have a source of earned income (retired), Clive's work adds a heavy dose of reality to an AIMer's goals.
Another aspect that Clive's work presents is the unavoidable aspect of governmental debasing of currency over time. Referred to as "inflation" doesn't change its meaning or nature. A quote from a famous AIM user, (Me!) serves as the underlying root of this problem:
Never, ever, has there been a government that, given enough time, didn't debase its own currency."
- Thomas Meldrum Veale
Something I've meant to examine in Clive's work is the annual rebalancing of an AIM Portfolio back to the Equity/Cash ratio suggested by the AIM-Index Portfolio. Where does the divergence occur? Is it driven by currency debasement alone? Is it a combination of debasement and withdrawal rate for living (SWR)? Or is it mostly driven by withdrawal for living (SWR)? I think the answer is that it varies over time in relationship to inflation. High inflation rates would drive the need for the Equity/Cash ratio to be modified during those years and the SWR would be the driving force in other times. It would be interesting to know what the average annual Equity/Cash realignment has been over the test period. In other words, how well did AIM do all on its own compared to the AIM-Index Portfolio?
Using the AIM-Index Portfolio as a risk measure for suggesting starting and ongoing cash levels in a real time investment could be compared directly to the v-Wave and the MRI (formerly Idiot Wave) for the data since January of 1982. That's the earliest we have for these data streams. If there was a 'problem' with Mr. Lichello's original AIM, it was the One Size Fits All cash reserve (actually three different One Size Fits All guesses).Further, AIM's Equity/Cash ratio of an ongoing investment was not sensitive to the performance of the Equity side vs the performance of the Cash side. During times of higher cash yields, AIM's reserves of cash appear to contribute nicely to overall performance. However, that's offset by whatever the inflation rate is during that same period. This negates or washes out this apparent yield advantage. AIM can be a good judge of Market Risk. AIM Cash's value is only realized when it's put to use rebuilding investment inventories. Having an non-AIM based opinion of market risk for verification of AIM's assessment can add significant comfort to an investor's mind. Plotting the three measures
1) AIM-Index Portfolio Cash
2) MRI Cash
and
3) v-Wave Cash
side by side could be telling in confirmation and accuracy for the last 40+ years.
AIM's Equity side can only perform as well as the underlying investment during times of no AIM designated trades. AIM only has the chance to out-perform the underlying investment by inventory adjustment (buys and sells) over time. The Portfolio's total performance is the combination of the Equity side performance and the Cash side performance. If the Cash side underperforms the Equity side then it acts as a performance dilutant (upward sloping market performance). If the Cash side is outperforming the Equity side, it acts as a buffer as long as it lasts (downward sloping market performance).
I think Clive's work has enhanced the understanding of AIM's long term performance as compared to Buy and Hold. Buy and Hold isn't what a retired person will do if the Withdrawal rate (SWR) is necessary for living expenses. So, his work is far closer to reality than simple Buy/Hold comparison. Our Equity Warehouses are a combination of businesses - Warehouse Inventory Management and Savings & Loan. Like any business, it has fixed costs that should be recognized (such as living expenses) which Clive represents well with his SWR. Our Warehouses operate in the Real World, so are sensitive to disruptive influences such as Inflation (currency debasement). Luckily, the warehouse's inventory can offset some or all of the inflation over time through growth.
Going back to a book report I wrote some decades ago helps to flesh out our Warehouse activities:
https://web.archive.org/web/20120830055138id_/http://www.aim-users.com/books.htm#b6
Best regards,
OAG Tom
I'm Very interested Jake
RE: my earlier post about Clive’s AIM-CASH …
I’ve done some further checking, and though I have more still to do I’m pretty sure AIM-CASH is a better way to assess risk and set a cash level for AIM positions.
For those who use Vealies when cash reserves seem to have built up, and sometimes try to decide whether a sale advice from AIM should be carried out or deferred via a Vealie, I’d suggest carrying out sale transactions instead if AIM-CASH is high (“Beware, the bear's in town”), while still preferring Vealies if it’s low or at a value in its mid-range.
Clive outlined a well-thought-through strategy in his “AIM sandwich” post which I’ll be looking into as part of the more-to-do I mentioned above. In the meantime, if anyone wants to know more about the reasons I see AIM-CASH as providing better insight than the VWave, please let me know. I’ll go into more detail if folks are interested.
Kind regards,
– MakeItJake
v-WAVE 3.0*
Suggested Starting Cash Value For New AIM Accounts/Positions
Individual Stocks
High Risk: At or above 51%
Neutral: Between 37 and 50%
Low Risk: At or below 36%
Diversified Funds
High Risk: At or above 34%
Neutral: Between 25 and 33%
Low Risk: At or below 24%
_________________________
Week of September 13th
_________________________
Short Term (18 Months)
Individual Stocks: 67% (Up 12 from previous week)
Diversified Mutual Funds or Portfolio: 45% (Up 8 from previous week)
__________________________
Long Term (3-5 Years)
Individual Stocks: 50% (Unchanged from previous week)
Diversified Mutual Funds
or Portfolio: 34% (Unchanged from previous week)
Oscillator: 1.88 (Down .15 from previous week)
*See posts #44585 and #44588
So far in September, most of my investments are still at or above their 26 week Moving Average prices. There are some exceptions, however!
Best wishes,
OAG Tom
Yes a evolved version of the TooFuzzy original, additional/modified javascript code and re-formed to use CSS/HTML5
Hi JD, Re: Calculator....................
It looks similar to the one provided by TooFuzzy years ago..................
https://web.archive.org/web/20120609073103id_/http://www.aim-users.com/calculator.htm
Best wishes,
OAG
Hi. What is the source of the calculator you show in the image? Thanks.
Hi Tom
RE: September fears
Changes always come with time :
Wait for Hallowe'en!
🎃
September Markets
are treated like boogymen.
Not always harmless....
OAG
v-WAVE 3.0*
Suggested Starting Cash Value For New AIM Accounts/Positions
Individual Stocks
High Risk: At or above 51%
Neutral: Between 37 and 50%
Low Risk: At or below 36%
Diversified Funds
High Risk: At or above 34%
Neutral: Between 25 and 33%
Low Risk: At or below 24%
_________________________
Week of September 6th
_________________________
Short Term (18 Months)
Individual Stocks: 55% (Down 7 from previous week)
Diversified Mutual Funds or Portfolio: 37% (Down 4 from previous week)
__________________________
Long Term (3-5 Years)
Individual Stocks: 50% (Up 1 from previous week)
Diversified Mutual Funds
or Portfolio: 34% (Up 1 from previous week)
Oscillator: 2.03 (Up 1.24 from previous week)
*See posts #44585 and #44588
A AIM sandwich is quite tasty
AIM as normal, inflation adjusted stock index price, but where if AIM-CASH transitions negative, set it to zero. So it moves back into some cash at the first sell trade, rather than potentially being stuck down in deep-down, all-cash-deployed limbo.
Identify ongoing AIM-CASH value / portfolio value, as normal, but cap it to 33.3% if less than 33.3%, 66.6% if greater than 66%, and sandwich that between stock and gold. So thirds each stock, AIM, gold (silver pre 1975 (gold prohibited), T-Bills pre 1933 (non-fiat currency era)).
Extract out that central AIM third and its growth rate slow beat all-stock, and its SWR was significantly higher than all stock, 5% instead of 3.5%. Heavy fuel.
If/when AIM is down into deep down territory the outer layers (stock and gold) keep things working (67 stock/gold rebalancing).
A factor with heavy fuel alone is that you have to be prepared to be all-in at times. With the sandwich you range between thirds stock/gold/cash at market highs, 67/33 stock/gold at market lows, broadly average 60/40. Which is less stressful for some. SWR is still good either way, comparable, yes fuel heavy will tend to average more rewards, but not that much more on average, 9.5% versus 9.1% growth rate slope differences.
Now look at them yo-yo's - that's the way to do it
Money for nothing ... so says TV (mTV)
Hi Clive, Re: AIM Cash Reserve levels....................
My U.S. Sector ETF portfolio was started at the end of May in 2009. It started at 8% Cash Reserve. Here's the cash track record as of the 1st of the year each year since:
Year Start Cash Reserve Previous Year Gain
2010 26% +24.6% (financial crisis)
2011 12% +17.2%
2012 13% - 0.7%
2013 21% +13.2%
2014 30% +24.6%
2015 27% + 3.2%
2016 27% - 5.2%
2017 17% + 9.9%
2018 21% +16.2%
2019 15% - 5.9%
2020 14% +25.2%
2021 21% +13.6%
2022 18% +15.4%
2023 10% -11.6%
2024 12% +16.2%
To Date 2024 16% +11.0%
Simplified AIM
If you AIM a single major stock index fund where dividends are automatically reinvested, and in retirement spend using your credit card where once/month you sell some of your portfolio value in order to pay that bill off, then AIM management can be simplified down to once/month reviews a week or so before the credit card bill is due to be paid.
You just need to store the AIM (on paper values) for Portfolio Control (PC), Number of Shares (#S), AIM cash (AC), and reference the stock fund price at the time of the review (I use real (after inflation price so have to divide that by the CPI index, where I use the one month lagged CPI index for that given its a late reported index)) ... pop those figures into a AIM calculator - that identifies the AIM %CASH applicable at that time.
With a second calculator you can drop your actual portfolios stock and cash (I use gold for 'cash') and the AIM %CASH figure as calculated above into that, along with how much you need to pay off your credit card bill .... that then indicates how much stock (and gold) to sell/buy at that time.
One sell trade/month that you'd be making anyway in order to make a withdrawal to pay off your credit card bill. Maybe a purchase trade, if the actual amount was meaningful enough to warrant that. With by broker I get a free trade each month as part of the package.
Basically realigning your actual portfolio into alignment with AIM each month, rather than trading at each AIM trade signal and where with a simple calculator and just a record of updated PC/#S/AC you're guided as to the value of stock to trade via a couple of mouse clicks each month (plus of course logging into your brokerage account to actually make the trade(s)).
Easy/simple enough to teach a partner who might otherwise be disinterested. Three updated figures to record (PC/#S/AC), reference the current brokerage holdings/values and current share price, run the calculator(s) and place a trade. Done for the month.
Clive
Another noteworthy aspect is that AIM tends to be the least worst. If for instance you start with a regular 50/50 portfolio and draw income from whichever of the two is the higher value at the time, otherwise left as is, then that is a form of partial rebalancing; Or you might rebalance back to 50/50 after withdrawing income (full rebalancing). Across all such sample runs those alternative styles yield different overall outcomes, one or the other isn't the consistently better approach. The differences can be significant, such as ending with 120% of the inflation adjusted start date portfolio value instead of 80%. To reduce the risk of being in the worst case choice you might start with 50/50 allocations to each of those, in effect run two separate portfolios for 30 years, same assets, just different styles, each providing half the income. Running AIM solely alone however and the results tend to be closer to the better of the two choices - is inclined to avoid being the worst case.
Fundamentally rebalancing is good if the prior trend reverses, would have been better to leave as-is rather than have rebalanced if the trend continues. Sometimes non rebalanced is better than rebalanced and in other cases vice-versa. AIM has a knack of being a bit of both, magically identifying the more appropriate choice of the two. Robert Lichello called it Automatic Investment Management, a more appropriate name in the present era however might be a Artificial Intelligence Machine. From a 30 year SWR risk measure perspective AIM has served well, inclined to be better than aimlessly :) picking and sticking with a rigid asset allocation/style.
From the Trinity study guidance withdrawal rates (SWR's) for different lengths of time
AIM is inclined to yield 100% when others might yield 95% probabilities, so as your horizon shortens so AIM might better achieve acceptable higher rates of withdrawal rates, perhaps such as 6% SWR with a 15 year horizon.
Hi Tom
Hi Clive, Re: AIM History.................
Something I've noted over the years and is demonstrated in your two histories is that AIM's recovery is generally faster and better than the S&P 500 benchmark. When the markets do tumble, there's a longer time to recover to the previous high for the index than with AIM. This is because AIM is being proactive during those downturns and rebuilding inventory where the index is not.
This can be seen in the period of time around Year 2000. It appears that the S&P 500 required until nearly 2005 to fully recover from the DotCom and WTC downturns. AIM, by comparison looks to have fully recovered by 2002-03. A similar experience seems to have occurred with the 2008 Financial Crisis. AIM recovered far more quickly and was 'ahead' by the time the S&P500 returned to previous highs. This "Time To Recover" is an interesting aspect of how AIM works.
Best wishes,
OAG Tom
Thank you Clive, Re: Year End Cash Suggestions with the Risk Indicators................
I really didn't think 2022 was that harsh a period, but the returns indicate it was far worse than it felt at the time when compared to other periods. It appears to be the 3rd worst drawdown in this 40+ year history. As you mentioned, it was the follow-up to the rather rapid gains seen just prior to this downturn. That run-up was in reaction to the Covid collapse and kneejerk reaction. It also coincided with the zealous period of New Issues that occurred at that time.
When I started working as an investment advisor in 2008 and founded SignalPoint Asset Management with my partners, I had to give up the i-Wave and my weekly reports here and on my web site for AIMers. I didn't like having to do that, so created the v-Wave for such gauging of market risk. A variety of people have been tending to that effort ever since. A big Thank You to them all, past and present. At the time I wasn't sure whether it would be as solid a gauge as the i-Wave, but has been better than I had guessed.
The original intent of these scaled market risk indicators was to assist AIM and Mr. Lichello's "One Size Fits All" cash reserve percentages. I think they've served that purpose. Using AIM's actual cash reserve levels based upon a market index would also, as you've shown, work to gauge a more appropriate cash reserve starting point than just an arbitrary, fixed percentage. Psychology has such a staggeringly heavy influence on investors when there are no consistent demarcations of risk. Getting caught up in either a bull run or a bearish nightmare usually has investors making very bad decisions. The "Cool Hand" of these two market risk indicators and/or AIM's ongoing cash level do a good job of benchmarking where the markets are compared to the average bipolar stock trader.
This has been a revealing exercise that you've done and I very much appreciate the time and energy spent.
Best wishes,
OAG Tom
Thanks Tom.
Converting to 'diversified' (dividing by 1.5), and comparing each rebalanced to the i/v wave indicated cash weightings at the start of each year, I'm seeing yearly (and accumulated) total returns comparisons of
S&P500 for stock, gold for cash, yearly total returns for those taken from Simba's backtest spreadsheet (Large Cap Blend stock value). The Dow real price AIM in that chart includes a 2% yearly uplift in PC from 1985, i.e. higher taxation directed towards more of earnings tending to be retained, prior 4% dividends declined more to 2%.
Whilst the S&P500 total return was clearly the better case since 1982, it should be considered that the 1970's were pretty harsh on all-stock, in effect the 1980/1990's were a run-up 'compensation' for the 1970's losses. The pains endured during the 1970's were a large part of the reason why the likes of Robert Lichello (AIM) and Harry Brown (Permanent Portfolio) devised 'safer' methods, 1968/1969 and early 1970's were very hard on some stock-heavy investors, some lost substantial wealth built up over many decades to levels where they thought they were comfortable only to see that wiped out across a few year, especially if they were in drawdown/retirement.
More broadly and AIM tends to plod along in a more linear upward slope, better rides such longer term cycles, and that lower volatility aids in uplifting SWR from 3.5% levels to 4.5% or even 5% levels. But that is multi-generational, a individual generation who started in the late mid/late 1970's lows in stock heavy were fortunate, a factor that helped Warren Buffett rise to being considered one of the best investors ever i.e. in part a consequence of coinciding with fortunate timing.
Fundamentally and the Aims/Waves seem to wash, the primary being that if you add-low/reduce-high in a manner that reduces being heavily in at a bubble peak, that often occur after relatively fast up-runs, then your drawdowns are lower, which reduces (improves) the worst case SWR start dates, where otherwise if you start one day with a 4% SWR and the next day stocks had halved that's little different to starting with a 8% SWR - that runs into potential bad earlier years sequence of returns risk that may extend into being critical/financially fatal (esp. if in retirement).
You might say that those that lost large fortunes in the late 1960's/1970's in effect gave them to the investors of the 1980's/1990's. A risk is that the 2020's/2030's could be more like the 1960's/1970's than being like the 1980's/1990's. Which in turn might result in those who do lose out heavily wishing they'd been invested in alternatives such as AIM, Permanent Portfolio and suchlike.
Thanks again.
Clive
Hi Clive, Re: Risk as measured by the v-Wave and the MRI over the last 4 decades................
Here's a list of those values in their "Single Stock" risk amount. These should be divided by 1.5 to get the "Diversified" value.
Year v-Wave MRI (old IW)
January
82 12.58 34.2
83 32.16 44.7
84 36.35 46.1
85 32.16 31.7
86 43.34 42.0
87 43.34 40.5
88 34.95 17.2
89 37.75 30.2
90 40.55 36.8
91 32.16 21.1
92 36.35 39.3
93 43.34 38.7
94 46.14 47.4
95 41.95 36.3
96 46.14 43.8
97 47.54 52.6
98 50.33 48.4
99 44.74 40.6
2000 43.34 49.7
01 36.35 34.6
02 44.74 40.3
03 39.15 22.2
04 50.33 34.6
05 51.73 43.1
06 50.33 50.1
07 51.73 49.4
08 46.14 39.8
09 20.97 3.0
10 46.14 27.0
11 48.94 34.0
12 40.55 27.3
13 46.14 27.0
14 53.13 41.0
15 53.13 41.0
16 47.54 30.0
17 53.13 44.0
18 54.53 48.0
19 39.15 24.0
20 50.33 39.0
21 53.13 57.0
22 51.73 58.0
23 43.34 48.0
24 48.94 44.0
Hi Tom
v-WAVE 3.0*
Suggested Starting Cash Value For New AIM Accounts/Positions
Individual Stocks
High Risk: At or above 51%
Neutral: Between 37 and 50%
Low Risk: At or below 36%
Diversified Funds
High Risk: At or above 34%
Neutral: Between 25 and 33%
Low Risk: At or below 24%
_________________________
Week of August 30th
_________________________
Short Term (18 Months)
Individual Stocks: 62% (Up 7 from previous week)
Diversified Mutual Funds or Portfolio: 41% (Up 4 from previous week)
__________________________
Long Term (3-5 Years)
Individual Stocks: 49% (Up 1 from previous week)
Diversified Mutual Funds
or Portfolio: 33% (Up 1 from previous week)
Oscillator: .79 (Up 1.33 from previous week)
*See posts #44585 and #44588
For those that have 'won the game' ... have enough, then IMO there's a lot to be said for thirds each home, stocks. gold
Your shelter is covered, no rent to be found/paid to others, perhaps where the imputed rent benefit is 3.3%/year value, 1.1% proportioned to total wealth. Dow/Gold and the Dow might throw off a 3.3% dividend, another 1.1% proportioned to total wealth. If from the Dow price only/gold 50/50 you draw a 1.66% SWR, that's another 1.1% of total wealth benefit. Combined 3.3% effective SWR - that when measured over the typical 30 year period = return of your inflation adjusted money via regular income, sourced from imputed rent, stock dividends, SWR, holding two-thirds of the assets in-hand (land (home) and gold), and where the other third can be liquidated in T+2 time (stocks), diversified across land, stock, commodity assets and where as a Brit GBP (home), USD (stocks), gold (global non fiat commodity currency). Historically that has tended to end the 30 years with your inflation adjusted start date wealth still intact, often more, so you both had the return of your money, via installments, and ended with your money ... have cake and eat it (https://en.wikipedia.org/wiki/You_can%27t_have_your_cake_and_eat_it)
Hi Tom
As per that 50/50 Dow/Gold example combined stock and gold make a good form of 'cash'
If you AIM'd cash, as in T-Bills, inflation adjusted value
where stock/gold was that AIM's 'cash', then there was enough volatility over time for AIM to have triggered some trades, but in a slow/progressive type manner.
AIM tends to trigger more sells than buys, so during that (poorly compressed/resized image taken from https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=3fqTTtRsACmPzhrurnRA8y ) 1980 to 1999 rise it would have been repeatedly selling T-Bills to add to stock/gold ... a form of momentum stance. And where over those years typically the interest paid on T-Bills declined from double digit type levels right down to low single digit levels. That's a complete opposite to more usual AIM that is anti-momentum, buys more as prices decline, reduces as prices rise.
From 2000, like the mid/late 1970's it would have been selling T-Bills to add to stock/gold (AIM CASH)
Not the best of choices, but a outside-of-box mind direct. It could be beneficial to have a momentum based AIM alongside anti-momentum AIM(s) as a diversifier.
Perhaps a better example is if you compare 50/50 stock/cash with 75/25 stock/gold ... i.e. as though 50/50 stock/gold were held instead of cash (T-Bills). PV indicates that comparison to have had the latter exhibiting a 2.9% or so higher CAGR https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=1Ort6gg4puv9lsmluN4YFB
Similarly comparing 50/50 stock/gold with cash https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&sl=13OlRmhaOaPNXkom8hXlzC saw a near 6% higher CAGR for stock/gold.
AIM can at times hold significant amounts of 'cash'. If/when that cash yields a higher return then obviously so also does the overall portfolio rewards reflect that.
Regards.
Clive.
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Assistants The Grabber Toofuzzy |
Here's a handy "Quick AIM Calculator" for finding the next AIM directed Buy and Sell prices for your portfolio holdings:
A.I.M. Users Bulletin Board (AIMUSERS): Thanks LC, Now they can use the "calculator" again! (advfn.com)
While the AIM book is no longer being reprinted, it is available from Amazon for their Kindle for $5.99.
http://www.amazon.com/How-Make-Stock-Market-Automatically-ebook/dp/B002VKJ1EI/ref=sr_1_1?s=books&ie=UTF8&qid=1395757939&sr=1-1&keywords=lichello
Mr. Lichello wrote the book on AIM in 1977. In the mid-'80s he put an infomercial on AIM on late night TV and attempted to sell his workbook and audio tapes.
(1) How To Make $1Million In The Stockmarket Infomercial - 1985 - YouTube
It's a reasonable review of the AIM method for those who are unfamiliar.
Run A Successful Equity Warehouse
Welcome to the AIM Users Bulletin Board. This is the thread to post your thoughts, questions and comments on the use of Robert Lichello's Automatic Investment Management for handling the risk of being involved in the Equities markets.
The AIM strategy gives the user LIFO gains of 20% minimum if the method is followed "by the book." It is ideally suited to those seeking long term investment growth while managing the risk of being invested.
Thoughts on being a successful Individual Investor
I wrote this book review a long time ago. It's a trader's interpretation of
Sun Tzu's "Art Of War." I related it to AIM as best I could.
------------------------------------------------------------------------
Mr. Lundell says, "Today's financial markets are the last bastion of unabashed conflict.....
To participate, you must be your own general, devising a strategy, gathering information, executing your plan, and adapting to the situation."
How can we use AIM and the v-Wave for strategic and tactical planning to carry out Mr. Lundell’s requirements to participate in the Equity Markets?
"Be your own general"
You are in charge. You are responsible. When you win, you benefit. When you lose, only you are to blame.
a) Broad trends persist. Discover them. They will survive boom and bust.
b) Don't contemplate engaging in war while beholden to another. They could become your ruler!
To me this means "Stay away from Margin Buying unless you are certain of victory."
c) Establish and maintain a "Baseline of Survival" for your command.
This is the "income" side of my overall portfolio.
d) Know that reality is governed by Darwinism; Long Term Survival belongs to the fittest.
"Devise a Strategy"
Our strategy is to sell inventory into market strength and to buy into market weakness. Robert Lichello's AIM algorithm provides us with a systematic approach to follow that employs this strategy.
a) Sell quality merchandise to all those willing to pay.
b) Buy quality merchandise when the price offers reasonable hope to resell at a profit.
c) Let the allocation of resources and inventory be governed by the course of the market and AIM's guidance.
"Gather Information"
Today there is no excuse for not being informed.
a) Differentiate between information VOLUME and QUALITY.
b) Differentiate between FACTS and OPINION.
c) Find good sources of judgement where you cannot act as judge.
d) Information is trusted only when provided by those proved trustworthy.
"Adapt to the Situation at Hand"
The v-Wave measures general U.S. Market Risk (and may be sensitive to world market risk) from low to average to high. This helps you gauge the situation by:
a) Gauging your initial cash reserve requirements on new investments
b) Gauging your on-going cash reserve requirements on established investments
c) Judging whether to establish a bias for accumulation or distribution
d) Possibly starting no new AIM accounts when the v-Wave is showing High Risk
e) Possibly ignoring all AIM Buy Signals during v-Wave High Risk events.
f) Following all AIM buy and sell signals during v-Wave Average Risk events
g) Possibly ignoring all AIM Sell signals during v-Wave Low Risk events
h) Re-assessing your "Baseline For Survival" at times when AIM has your account heavily in Cash
i) Always attempting to beat measured inflation by 5 basis points minimum after all taxes and living expenses are paid. If you do this consistently, in good and bad markets, you will be winning long term
j) Possibly using "vealies" when your positions are cash rich relative to the v-Wave. Limiting supply helps to keep Momentum player’s Demand high.
"Execute your Plan"
Set the plan in motion; know that it takes time for realization. Follow the plan without hesitation allowing the goals to be realized. The strategy is sound so execution is all that is required.
a) Buy when the plan says
b) Sell when the plan says
c) Be very patient when no buy or sell signals are being generated
Reading Mr. Lundell's interpretation of Sun Tzu's work will help you focus on your own plan. It will arm you with knowledge of what others not using AIM are doing in the market. Understanding Short Term Trader's strategy and tactics is like having a spy in the enemy's camp. AIM users can profit by knowing just how these people think and act. AIM acts as almost a mirror image of what goes on in a trader's mind.
-------------------------------------------------------------------------------------------------------------
The v-Wave........
Mr. Lichello used fixed cash starting levels; first it was 50/50 then 67/33 and in the last edition of his book 80/20 for the Equity/Cash ratio. This "one size fits all" approach is like a broken watch that shows the correct time twice a day but is wrong the rest of the time!
Minstrlman, a regular contributor here, helped gather data from Value Line and formed a highly capable risk-cash indicator for our use. Since then, J Derb continued his work each week. As an adjunct to the AIM methodology we now have a Cash Indicator which helps guide our starting and ongoing Cash Reserve level of AIM relative to measured market risk. It can be used as a general market barometer or specifically with the AIM method. The v-Wave (or VW) is derived from the Value Line "Appreciation Potential - Next 3-5 Years" (VLAP) indicator shown weekly in their Summary and Index Section for their 1700 stock edition. Looking back through V/L's history we find the peak Appreciation Potential occurred 12/23/1974 at +234%. Our continuous database starts January of 1982 and we scaled our "zero cash" to the market risk low point of early that year. We take the VLAP and manipulate it to get an indication of how much cash should be reserved for diversified mutual fund AIM accounts. It should be multiplied by your stock or portfolio's BETA to get the cash reserve level of less diversified or more aggressive holdings.
v-Wave Weekly Cash Reserve Indicator For AIM Users
Current years of the v-Wave:
For diversified portfolios the Median value for the v-Wave is 29.5%. High Risk is 34% cash or higher for individual company stocks. Low Risk is 24% cash or lower.
To get a more proper cash level for individual company stocks multiply the current "Diversified" value by 1.5. This gives us 51% as the high risk threshold and 36% for the low risk boundary.
Looking at the cumulative risk of the v-Wave gives another perspective:
Cumulative v-Wave is calculated by taking each week's v-Wave Stock value, subtracting the median value from it and adding it to the previous total.
Significant historical events are shown nicely here and the v-Wave's response at those times.
v-Wave Calculations can be found at #30219. The data are a work-in-progress for now.
TooFuzzy provided us with a handy "Quick AIM Calculator" Here's a link to that page:
A.I.M. Users Bulletin Board (AIMUSERS): Thanks LC, Now they can use the "calculator" again! (advfn.com)
(follow the link on the above page)
AIM has a predictable pattern of "cash burn" in a declining market. Depending upon the SAFE settings AIM will generate new buy orders sequentially as share prices decline. It can be helpful to know in advance about how deeply AIM is going to draw down one's cash reserves. This link is to the "Cash Burn" AIM page. It shows various end points based upon the starting cash reserve level. Here's a link to that page:
"" rel="nofollow noopener noreferrer ugc" target="_blank">http://www.aim-users.com/cashburn.htm"; rel="nofollow noopener noreferrer ugc">A.I.M. Cash Burn Rate (archive.org)
Best wishes,
Old AIM Guy
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