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Is it necessary to consider stock prices at all? Can't you just use the value of current value of the stock account and its deviation from the starting value, of say $2,000? I.e. if at the end of year 1 the value of the account has dropped to $1,800, i.e. by 10% you buy (approximately) $200 worth more shares, and if at the end of the following year the value has risen to $2,200 you sell $200 worth of shares.
Daisy.
Re: Updated VWave
Thanks very much for posting the separate value for diversified mutual funds - it is a VERY useful addition. Although I have read about this difference from the one for individual stocks, it was after I had started several AIM accounts. From now on it also has a more 'official' status. There is a slight question about how diversified is diversified - precious metals fund probably not, but domestic mid-cap fund?, emerging markets fund?
For more recent accounts I having been using the percentage drop from the current value to the last major low, generally March 2009.
Is there a rational way of moving to the lower level for mutual fund AIM accounts that were started using the higher VWave cash level and have been running for a while? Phasing more in from the cash reserve over a few months perhaps.
Daisy
Hi TooFuzzy,
Well, P/E is currently lower than 20 minus inflation, i.e. the index is below fair value, so it kind of follows that the cash proportion should also be below average and the equities proportion above average - if you believe in this approach, that is.
In general I don't find it difficult to get my algebra upside down though!
There are other equations one could use. The value is currently only in the 30th percentile of values, which could be taken to imply only 30% for cash!
I think one weakness of this metric is that it uses the TTM P/E, and is thus much affected by earnings cycles.
Daisy
Rule of 20
A possible alternative to VWave? Under this rule fair value PE for the S&P 500 is 20 minus inflation, so at present FV PE = 20-1.4 = 18.6. Actual TTM PE is 16.1. So if the appropriate cash % for new AIM accounts when the S&P 500 is at fair value is assumed to be 50%, you could say that at the present level it should be
50 x 16.1/18.6 = 43%.
Interested to read any comments about the usefulness of the Rule of 20.
Daisy.
A Simple & Powerful Timing Indicator
Stumbled on this over the weekend. AIM it ain't, but simple and powerful it could be. See:
http://quantifiableedges.blogspot.co.uk/2009/05/simple-powerful-timing-indicator.html
and
http://www.ftpress.com/articles/article.aspx?p=605370&seqNum=13
Have checked it out using Yahoo data, which for the NASDAQ composite starts in 1971. End result from then to date appears to be 60% up on buy and hold, but starting at various different dates might well give less favourable results.
Daisy
A modified regular investing system.
Twinvest and Synchrovest are based on a ‘norm’ of 75% into equity, modified according to price changes. Where does the figure of 75% come from? It is considerably higher than the 50% Lichello originally proposed for AIM. Perhaps this reflects the greater safety obtained as a result of investing over a period at various prices. But after some time Twin/Synchro-vesting, an account of considerable size will build up which is around 75% in equities, and therefore rather exposed to a big drop.
What about the following? Use VWave to determine the first monthly contribution proportion (of say $1,000) which goes to cash, the balance to equities. The next month, suppose VWave has gone from 49.72 to 52.85. Assume the market has gone up to cause this. The value of the previous month’s equity investment will have increased. This ‘system’ will add the new month’s $1,000 to the existing cash plus equities total, and the new target total equities % will be 100-VWave. To achieve this, the new month’s contribution to equities will be considerably lower as one will be adjusting the existing holdings as well. After a sustained period of market increases some sale of equities could even result. It will prevent the total invested in equities from getting dangerously high and seems to combine the effects of value averaging and variable ratio/core position trading. Market falls on the other hand will see a greater proportion of the new investment going into equities, and in extremis some of the existing cash holding too. The swings in the proportion of each new investment which goes into equities seems to be greater with this approach than under Twin/Synchrovest.
Daisy42
AIM-HI & Retirement AIM
For those of us who are retired, a combination of Lichello's AIM-HI with his Retirement AIM could be an answer. For AIM-HI he specified 20% initial cash and 10% minimum trade size (with no change to 10% SAFEs). But this century we've seen two bear markets that would have wiped out that cash level. (I'm not forgetting we now have the VWave to give us an adaptive cash level recommendation.)
For retirement AIM he specifies using a fund that has bonds in it as well as equities. In the UK Fidelity has a suitable fund, and it declined by around 20% in the bear markets, so could be suitable for an 'AIM-HI in retirement' approach. It currently has a yield of 4.25% - useful. It won't shoot the lights out, obviously, and will trade rarely, but keeps a high proportion in the fund to get more of the yield, and keeps a cash reserve to give comfort and enable buying cheaply in bear market. (Plus the fact of knowing what to expect and what you're going to do in a bear market - having a system, i.e. AIM, makes it much more unlikely you'll panic and get shaken out.)
I must admit what scared me in 2008 was when my investment grade corporate bond funds also started going down quite a lot, when I was hoping they'd give me some protection. That experience showed the value (then anyway) of government bonds, which did inverse-correlate very well, plus having a system with a cash reserve to take advantage of low prices.
Daisy.
"Another reason no to try and predict market movements and just use AIM and not be afraid of a cash buildup."
Absolutely!
Daisy
The full paper can be read at http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech582.pdf.
In addition to the Paulos book, there is also Nassim Taleb's 'Fooled by Randomness', of course.
Daisy42
Recently there were several posts about the use of standard deviation, one of which included the reference to 67% of events lying within one standard deviation of the mean. That is (only) true of datasets that conform to the statistical phenomenon known technically as a ‘normal distribution’. This reminded me of a book I read called ‘A mathematician plays the markets’, by John Allen Paulos. In it he points out that financial data series do not always conform to a normal distribution – rare events are more common than they would be if that were the case. He said they tend to follow a power law, more specifically the cube law, in which so-called rare events are more common. Andrew Haldane, Executive Director for Financial Stability at the Bank of England, has just given a paper (Tails of the Unexpected – see http://www.bankofengland.co.uk/publications/Pages/news/2012/058.aspx) calling for the risk models used by financial institutions to be torn up, because they are based on normal distributions, not the ‘fat-tailed’ ones which seem to be the reality, thus underplaying catastrophe risk.
Interesting stuff (I think), and a warning not to expect 67% of movements in prices etc to be within one standard deviation of the mean, and 95% within two standard deviations!
Daisy42
End of May review
For anyone who's interested, on 1st June I followed AIM's instructions to buy 11.8% more of my gold stocks fund (having bought 7.5% on 1st May) and 6.4% of my global emerging markets fund. I look forward to profits in due course!
Daisy42
Hi Adam,
I like it!
As well as a long-term Twinvest account, I'm phasing finite amounts of capital into several other accounts using Twinvest, which I will then turn into AIM accounts, as you've done. I have a slight dilemma about at what point to turn them into AIM accounts, in terms of the proportion remaining as cash. If I keep Twinvesting them until the process finishes (12 months in total), I'm likely to end up with a smaller proportion in cash (perhaps 25% on average) than the V-Wave will be recommending at the time for new AIM accounts. An alternative I've thought of is to turn them into AIM accounts when they reach the V-Wave recommendation (or whatever I decide to use instead as a guide) at the time, which will be earlier than 12 months I imagine. What did you do?
Regards
Thanks Tom,
Yes, I read Lichello's instruction NEVER to invest less than 25% in the equity fund, because when you reach that point the asset would have tripled in value, and you should close it and start again, as you did. I've started a SynchroVest-based account for our granddaughter, but on the basis of my little study, I'm switching it to TwinVest. Another point, which I didn't mention, is that using Lichello's example, the TwinVest account ended with 15% cash and the SynchroVest account with only 3.5%.
Twinvest v Synchrovest
I’ve read a few comments to the effect that Lichello’s older phased investing system, Synchrovest, is superior to the Twinvest system he describes in his AIM book. Has anyone done any tests on this?
On pages 232 – 233 of the 4th ed. (2001), Lichello gives a table of data comparing Twinvest with simple DCA. The price sequence starts at $10, advances to $15, retreats to $5, then returns to $10, in $1 steps.
I’ve created a spreadsheet of the Twinvest part of this, and also created one using the same price sequence but investing by Synchrovest. My results are a gain of 17% for Twinvest (as in Lichello’s book), but only 14% for Synchrovest, and Synchrovest runs out of cash when the decline reaches $8. This price sequence is quite extreme, embodying a fall of 67%. I’ve also experimented with a rise from $10 to $15 followed by a 50% fall back to $8 then a return to $10, a fall from $10 to $5 followed by a rise back to $10, and a rise to $15 followed by a fall back to $10, plus a revised version of the original series using the ‘halfway to the wall’ technique to prevent Synchrovest running completely out of cash (i.e. never spending more than half the remaining cash). In all cases Twinvest produced better results than Synchrovest.
Perhaps I’m doing something wrong!
Intuitively I would expect Synchrovest to perform better in a bull market, and for a very long term investing programme, because it is based on a cumulating average price, which will rise gradually, rather than a fixed starting price, which will get ‘left behind’, so Synchrovest would tend to purchase more.
Hi TooFuzzy
I think we're talking about two different measures/types of volatility here. In the UK some direct property mutual funds sure went down a lot, and have gone up again somewhat, but have low volatility as measured by SD, i.e. they do it in a relatively smooth way. I suppose something that habitually oscillated by plus then minus 20% each way fairly frequently would generate some reasonable trades, but I'm not sure if anything does that. The high - low range, and where our target is within it, or at least how far it is above the last major low, how over/undervalued etc, could be things we use to determine the starting cash/fund ratio, I believe. I agree a nice big high low range should be more reliably profitable. I'm also sticking with standard AIM parameters for the moment.
A related point I have raised before, but I think Tom frowned on it, is to split SAFE according to where we believe the fund or whatever is within its high-low range, or how far above the last really major low. If something has gone down to near the last very major bottom, we could think about splitting SAFE so that buying resistance is lower and selling resistance is higher, conversely for something that has gone up a lot (say from 2003 to 2007) we could have a low proportion of SAFE on the sell side, and the bulk of it as buying resistance. Still seems quite logical to me.
Best wishes
Calculation of standard deviations
My understanding is that standard deviations for funds are based on the average of monthly returns over the specified period - 1 year, 3 years, etc. In other words it measures the variability of the monthly change. I think high - low relationships are something different. Two funds could both decline by 50% then return to the starting price and have very different SDs. Something that declines by a steady 1% per month over 36 months would have a 3 year SD of 0, as would something that went up every month by 1% for 36 months, because there's no variation in the change from month to month. Something that zig zags on its way would have a higher SD. If SDs for individual stocks are not published you can just download the monthly prices for the chosen period, then use Excel to calculate the % change from one month to the next, calculate the average monthly change and then use the stdev function.
SD-based SAFE settings
I quite like the idea of total (buy plus sell) SAFE settings being based on standard deviations.
Looking at the funds I'm currently following would give the following:
US index 14%
European index 23%
UK FTSE 250 index 19%
Japan index 14%
Pacific index 21%
UK FTSE All-Share index 16%
Gold stocks fund 27%
Emerging markets index 23%
Investment grade corporate bond fund 3% !!!
High yield bond fund 12%
UK government bond index 5% !!!
Long dated UK government bond fund 10%
UK smaller companies fund 18%
Splitting the total between buy SAFE and sell SAFE, I think these figures look about right. I'd be inclined to keep the MTS at 5% though (of current value) to avoid low value trades. The very low SAFE settings for the bond funds would presumably generate more action, tempered by the 5% MTS however.
Daisy.
Hi Tom,
First off, I found an error in my second spreadsheet - the profit on 10% buy SAFE and 0% sell SAFE was 18.7%, not 17.0% - apologies.
I've reworked the figures as you suggested, with 20% buy SAFE and 0% sell SAFE, and the profit came to 18.2%. Much more cash was left at the bottom.
I should say that in all cases I calculated SAFE with reference to current stock value, but calculated the 5% MTS with reference to PC (probably inadvertently). I'll try them again with MTS calculated with reference to current stock value.
I could send the spreadsheets for you to check, but I don't know how to do that at the moment.
Best wishes.
Split SAFE
I recently constructed a hypothetical AIM account with 50% starting cash, SAFE at 10% for both buys and sells and 5% MTS. I made the price immediately decline to 50% of the starting value, in steps which corresponded exactly to the buying thresholds for successive AIM purchases in accordance with the set criteria, adding 50% of the purchase to PC each time, then I made it climb back to the starting price in steps which exactly corresponded to the thresholds for AIM-induced sales. There were 17 steps down and 11 steps back. The overall profit (including the cash element) was a gratifying 23%. Using conventional constant value investing with 10% buy and sell thresholds produced a profit of only 4%. An illustration of the power of AIM, through its PC mechanism.
As there has been some recent discussion about split SAFE with 10% buy SAFE and 0% sell SAFE, I re-ran the exercise with those parameters. The overall profit was lower at 17%, and there was one extra sell transaction (because selling started earlier, of course). Presumably the additional profit of classic AIM comes from delaying the first sale while the price rises further.
These figures are completely artificial of course – nothing can be expected to decline straight down in such precise steps and back up again, but it illustrates the mechanism and its benefits, and it has helped me to follow through its workings.
Daisy
International applicability of the V-Wave
I believe the V-Wave is based on the US market. Acknowledging that stock markets have a pretty high correlation with each other, to what extent is it valid to use the V-Wave figure as a cash percentage when starting AIM accounts that relate to the UK, European, Japanese, Pacific and Emerging markets, and from a UK currency perspective? Should one consider alternatives more relevant to those specific markets, and based in UK currency?
An additional point is that Tom has said that the V-Wave figure could be reduced for broad-based funds.
I have or I’m progressively building through Termvest, AIM accounts that track the US, UK, European, Japanese, Pacific and Emerging stock markets, plus a gold stocks fund.
As a possible alternative to the V-Wave, I’ve thought about using by what percentage each would have to fall from its current price to hit its 2008/09 low. I realise of course that prices could drop further than that! This approach gives the following figures, as of 18th May prices (they are UK currency, index-tracking mutual funds):
US 37%
(S&P 500 itself 49%)
UK mid-cap 41%
UK All-Share 37%
Europe 14%
Japan 17%
Pacific 40%
Emerging 52%
Gold stocks 51%
A further point is that Jeff Weber has said that when adding to AIM accounts (perhaps starting them as well), it is good to try to do it when the stock is at or near its 52-week low. (Of course, like buses, sometimes you wait ages for one, then several come along together!) The funds I’m following are at these multiples of their 52-week lows:
US 1.12
(S&P 500 itself 1.18)
UK mid-cap 1.05
UK All-Share 1.06
Europe 1.00
Japan 1.00
Pacific 1.02
Emerging 1.00
Gold stocks 1.00
Looks like there could be some opportunities here - but not everwhere.
Any comments welcomed!
Daisy
Lichello clearly said operating AIM fortnightly is an option - a "definite maybe" were his words, I think, "if you want more action". Although I don't think he gave any worked-through tables, he said this would probably be more likely to use up all your cash in a deep down market - he seemed to be saying this more in the sense of 'utilise' than 'exhaust' though, in other words he seems to suggest it could be a good thing. Those with AIMing experience post-2000 may well say it is much more likely to exhaust your cash too soon, so you have nothing left to buy with near the bottom. The Cash Burn chart is the guide.
As a recent AIMer of a few months experience I find waiting a full month is hard. Being new to it means the desire to see some AIM transactions is strong - which must be a bad reason. I have a gold stocks fund for which AIM is asking for another 12.5% of its current value, it having had 7.5% at the end of April. I'm pretty sure the 'master AIMers' on this BB will advise me to wait until the end of May! I started the position with 50% cash. Lichello wanted people to be able to get on with the rest of their lives!
At this stage I am operating all the AIM parameters on all my accounts at the default position.
Daisy
Hi Tom,
Thanks for that, very interesting. The slight modification seems to increase the buying resistance and decrease the selling resistance, both slightly. AIM seems to have an 'upward bias' - perhaps appropriate since over very long periods the stock market direction is upward - and this modification does reduce that bias a bit, I think.
Had a quick look at the formula you referred to. I have looked at those diagrams before. Perhaps I'll have a longer look when I'm feeling stronger!
Just going through this process has increased my understanding of AIM.
Best wishes,
Daisy.
Thanks Tom and Toofuzzy,
I have looked at the AIM Calculator, but use little spreadsheets I made myself to do my own calculations. I can input different prices on a trial and error basis into my spreadsheets to build a list of threshold buy and sell prices, if I want to, but that's laborious and not very satisfying.
Overnight I thought, "Perhaps the LD-AIM spreadsheets will do it!", and indeed they do. If you put your parameters into it the Work Tables worksheet lists the buy and sell prices.
I've found it instructive to see that with 10% SAFE and 5% MTS, the price would have to rise by 18% to get the first sale. This is helpful because when considering, "Shall I buy this?", you can think, "How likely is that to happen?". It also shows that the first buy would come after a 13% price drop, and that subsequent threshold buy points would be at 3% price steps. Subsequent threshold sell points would be at 5% price increments. This is all due to the fact that SAFE and MTS are calculated on current price/stock value, not the starting figure, so it's a moving target, which is harder to conceptualise.
Fascinating!
Best wishes,
Daisy.
Is there a formula or spreadsheet that will list for you the buying and selling prices for a security bought at a particular price with given SAFE and MTS levels? E.g. if you put in, say original buy price of 15.21, SAFE of 10% and MTS of 5%, it will list out buy and sell prices?
Daisy.
Thanks Tom, and for all your guiding and supporting messages over the last few months, which I've considered carefully if not always replied to. I've recently obtained a copy of 'the book' and read it pretty much from cover to cover. Yes, following it somehow gives you considerable confidence, and prevents hasty (and frequently inappropriate) action.
Best wishes,
Daisy.
My first AIM-directed purchase!
In contrast to all the high-powered recent posts, on May 1st I made my first, modest, AIM-directed purchase - a 7.5% addition to my gold mining stocks fund. Just need a profit now!
A few months ago I had a few AIM-directed sales from my UK government bond fund holdings.
Daisy.
Month end effect
Is the end of the month a good time to review AIM accounts and make regular contributions to Twinvest and Synchrovest programs? (Pace all you GTC traders!)
"Turn of the Month
Turn of the month is a term that refers to the tendency of stocks to rise at the turn of a month and fall in the middle of a month. This tendency is mostly related to periodic new money flows directed toward mutual funds at a beginning of every month (To learn more, see When To Sell A Mutual Fund, Advantages Of Mutual Funds and Disadvantages Of Mutual Funds.)
How can you benefit?
This is a powerful effect that is easy to use. If you have a monthly plan, you should consider making regular contributions in the middle of the month rather than at the beginning."
See: http://www.investopedia.com/articles/05/seasonaltrends.asp#axzz1tQrJSAI3
Read more: http://www.investopedia.com/articles/05/seasonaltrends.asp#ixzz1tQsT6oY4
Daisy
Re: Lichello, "By the Book"
I'm using open-ended mutual funds, for which GTC orders aren't available. I'd have to make a major change and switch to ETFs. It may be a good idea to do that, but would take quite a bit of work. My reply to Steve goes into more detail.
Towards the end of the 4th ed, Lichello backs his AIM-HI version, with only 20% starting cash, and 10% minimum order size - even in the light of the 1987 experience and his awareness that the long secular bull market appears to be coming to an end. He doesn't seem to worry much about drawdown!
Best wishes,
Mike (Daisy42).
"Thirty days hath September..... "
Oops!
Hi Tom,
"It's nice of you to provide the needed liquidity for those wishing to sell their gold stocks!"
Not yet! I've decided to keep to month-end reviews and actions, so we'll see what April 31st brings - I might get them cheaper!
I now have Lichello's book, 4th ed 2001. He clearly favours monthly reviews. He does accept fornightly reviews - nothing more frequent though, as far as I can see, and having dallied with fortnightly returns to his original monthly preference.
Best wishes,
Daisy.
Hi Steve,
I ordered a secondhand copy of the 4th, 2001 edition last night (from the US via Amazon). It'll take a while to arrive but I should be up to speed before too long!
Thanks for the advice about residual buys, and the 30-day rule - it suggests to me I might stick to a monthly review process altogether, possibly making an exception for unusually large price drops.
I'm not currently operating in an environment where GTC orders are possible. I'm using open-ended mutual funds through Fidelity. It's clunky - moving money from cash to an equity fund within an account takes 2 days, and you don't know the fund's exact price when you place the buy or sell order. They are tax free savings accounts, which imposes additional complications and restrictions - we can have one each tax year, size-limited, and you can't put more money in after the end of the tax year (though you can switch between funds, and to cash, within them), so you end up with quite a few. It would take quite a lot to change it all, assuming a better provider/environment is available over here.
Best wishes,
Daisy.
Hi Steve,
Thanks for your comments. You're spot on: AIM is suggesting adding 6.3% more shares. I have no qualms about doing that. I haven't actually read Lichello's book, so I rely on this Bulletin Board to learn what he actually said, plus the suggestions for modifying it. I was under the impression, perhaps wrongly, that the basic system says to check, and transact if appropriate, once a month. Tom has also said only to buy at 30-day intervals to conserve cash. I don't mind operating the system more frequently, but it leads me to wonder about the residual buy suggestion that will occur after purchase when you add half the purchase value to Portfolio Control, and then half again, etc., (until they get below the minimum transaction value - which would happen immediately in this case). If you work on a monthly or even weekly cycle this would tend to take care of itself.
Best wishes,
Daisy.
Hi Steve,
It peaked at £17.38 in Jan 2011, I bought at £15.21 in Jan 2012, and it's now £13.08. It bottomed at £5.65 during autumn 2008 - which perhaps suggests I shouldn't rush to buy! I have SAFE set at 10% for buy and sell - it's pretty volatile. I started it with 50% cash.
Daisy.
My first AIM buy signal!
My gold stocks fund holding issued a buy instruction at March month-end, but it was too small to action. It has since increased to an actionable level (just about), but I suppose I should be disciplined and sit on my hands until the end of April. Interesting how AIM can engender a positive emotion when your investments go down in value - first time I've experienced that!
Daisy42
Has anyone come up with a V-Wave equivalent for bond funds? A way of establishing the currently advised cash proportion when starting bond fund AIM accounts would be useful.
Could yield be a basis? E.g. in the UK the 10-year gilt yield is in the bottom percentile, going back to 1985 (whereas the FTSE All-Share Index yield is in its 78th percentile). This suggests a currently very high level of risk for UK government bonds.
Allowing for inflation, the gilt yield is in its 2nd percentile and the equities yield is in its 48th percentile.
However, the gilt yield minus the cash yield is in its 78th percentile - the depressed cash yield has pushed money into bonds of course.
Daisy.
Toofuzzy,
I already have 6 AIM accounts running covering UK equities, emerging market equities, gold mining equities, UK government bonds, index-linked UK government bonds, and corporate bonds.
I have the cash and wish to create additional AIM accounts covering US equities, European equities, Asia-Pacific equities and Japan equities. Rather than take my equities proportion up dramatically by starting them all at once now, even leaving about 55% cash for each, at a time when the markets have all gone up a lot, I have started 12 month Termvest processes for them all.
It is in looking at what I will need to do at the end of the 12 months, when I convert them to AIM accounts, that I came across the two different ways of establishing the Portfolio Control value - on the total of purchase costs over the 12 months, or the value at the end of the 12 months. Hence my question.
Regards,
Daisy.
Twinvest/Termvest question
The question concerns setting the Portfolio Control when switching Twinvest and Termvest processes into AIM accounts.
The descriptions of Twinvest say to set PC equal to the fund's value at the time of the switch.
The descriptions of Termvest, on the other hand, say to set PC equal to the total cost of all the equity/fund units purchased during the Termvest period.
Is there a reason for this difference? Clearly taking the Termvest approach could mean that a buy or sell could be required as soon as the switch to AIM is made.
Best wishes,
Daisy.
Hi Tom and TooFuzzy,
Thanks very much for the comments.
Tom,
Somehow I had a feeling my reference to the Cash Burn table would invoke a response – clearly I didn’t understand its layout! Actually, I had thought from what I’ve read previously that you should allow roughly the same percentage in cash as you want to make provision for in terms of a drop.
It occurs to me that maybe the starting 25% for cash in Twin/Term/Synchro-vest is a bit of a one-size fits all figure in the same way that the original AIM 50% was, and perhaps the 25% could be modified to take market risk into account in much the same way that VWave does for lump-sum investing with AIM. As the VWave value is currently 54.41, perhaps the 25% should be 27.21 this week, for example. You could then either continue on the usual Twin- or Synchro-vest basis in the following months, or continue using a derivative of the VWave itself to determine the cash percentage. It seems logical with both that the starting point should take market conditions into account, though much more so with a lump-sum, obviously.
I fully appreciate your point about a portfolio diversified across multiple asset classes needing less cash – provided they really are uncorrelated though. A problem in 2008 was that almost everything went down together – apart from government bonds, which went up a lot, and again in 2011 government bonds helped a lot. Having lots of government bonds doesn’t seem like a good idea now though, on a valuation basis.
TooFuzzy – asset allocation.
Yes, I’ve read loads about asset allocation, and I’ve come across one’s similar to yours in a number of US references. It could work in a UK context. I did consider using a global non-UK equities index tracking fund, rather than divide it up by geographic region, but the volatility is reduced. A problem with the UK’s large cap index, the FTSE 100, and because of capitalisation-weighting the FTSE All-Share as well, is that they are more international rather than reflecting just the UK economy, which is why I’ve gone for a FTSE 250 index tracker. It deals with the small(er) contingent to some extent. There doesn’t seem to be a UK small companies index tracker. In the UK REITs seem to be very highly correlated with equities generally – their main benefit would perhaps be dividend yield.
Some non-capitalisation weighted passive funds might be nice – as I read yesterday, index trackers are forced to buy high and sell low, in a way. Very non-AIM!
I'm already finding (though it's very early days) that adoting these techniques is making me feel more relaxed about my investing. I like too the beauty of the simplicity in that they use almost entirely just the value of your holdings (for AIM) itself, and prices for the monthly investment methods. No charts and indicators to agonise over. Also, you can forget it until the next month.
No investing next week anyway - walking in southern Spain.
Best wishes,
Daisy.
Good evening Tom, and thanks for your helpful comments.
I have now made the first month's contibutions to 4 new 12-month Termvest accounts on a 75%/25% basis, covering the USA, Japan, Europe and Asia Pacific. They are however based on smaller totals of about £5,000 each. I came to the conclusion that spreading the input over 12 months is an additional method of risk reduction which justifies the higher figure of 75% compared to around 50% for lump sum AIMing. I can of course stop when I get to 50% if I feel like it, which without price change would take 8 months, or achieve the same reult by adding more cash, if I have it.
Looking at the AIM Cash Burn table, it suggests to me that an initial 50% cash could survive an 80% drop and still leave 30% of it.
I assume your suggestion is that one could be more conservative by reducing the monthly proportion could to 50/50, and thanks for that, but I've decided that would be over-cautious. Famous last words!
Best regards,
Mike.
AIM or Termvest?
Over the last few months I have established AIM accounts for:
1) A UK FTSE 250 Index fund (more British and more volatile than the FTSE 100 and FTSE All-Share indices)
2) A global emerging markets index tarcking fund
3) A gold mining equities fund
4) An investment grade corporate bond fund
5) A UK government bonds index tracking fund (no associated cash element – could be a cash substitute)
6) A UK index-linked government bonds index tracking fund (no associated cash element – could be a cash substitute)
I try to get about £5,000 into each fund and keep around the VWave amount additional as the cash reserve. I don’t need a minimum trade percentage – there are no transaction charges on the index tracking funds, and a standard 0.25% (on buying only, selling’s free) on the others, but I like to set a minimum trade amount of £250 to avoid very small trades.
I have also started a Twinvest/Synchrovest account for our granddaughter, putting some into a FTSE All-Share index tracker each month.
I have the cash to establish four more AIM accounts, and I’m thinking of index trackers for Asia Pacific, Japan, North America and Europe. An additional possibility is natural resources/commodities – nice and volatile but there’s no cheap index-tracking open-ended fund available here.
I’m reluctant simply to start them all, even based on the current VWave cash element of about 55%, given the run-up in the markets over the last few months. My options seem to be: a) wait for the market to drop (could have started!), b) spread them out and start one a month, c) convert them all over say 12 months using Termvest.
With c) I’m trying to figure out the desirability/rationale of using the higher 75% fund proportion used with Twin/Term/Synchro-vest, compared with the lower circa 50% used for lump sum investments. I can see that spreading the investment lowers the risk and therefore a higher proportion can be justified, but if the price doesn’t move during the 12 month, you end up with 75% fund and 25% cash – there could then be a big drop in month 13! I suppose I could stop once the VWave proportion has been reached and turn them over to AIM at that point.
LD-AIM could possibly have a role in all this too (or instead of) – something else I’m still trying to think through – thanks for the helpful posts about this recently.
Best wishes to all,
Daisy