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BTW the green and blue bars are stacked bars in that first chart, so the peak/tops of the blue bars provides an indicator of the total AIM value at any one time (cash + stock value combined).
I seem to recall Mr. Lichello warning against running AIM too often. Running it daily might not be wise, better to run weekly or monthly
Hi Steve.
Drawdown is just the current AIM total value divided by the highest previous AIM total value (so how much lower the value is compared to its history).
The first charts red line that's based to the right Y-axis shows the buy and hold total stock value (including dividends i.e. Yahoo Adjusted Close price) motion over the period. The drop from its peak of that line indicates the drawdown of buy-and-hold (by eye something like down from a 35 share price down to around a 7 share price i.e. around a -80% drawdown).
All entered/from your original AIM spreadsheet, but tweaked to include the charts and a few other things (Vealie's, including cash gains, set to not move into negative cash amounts if there's a buy but insufficient cash to do so etc.).
Best. Clive.
I tend to use Yahoo Adjusted Close prices as they reflect the inclusion of dividends (and splits) - as though you'd reinvested dividends. For cash I typically use something like SHY.
For that same period I'm seeing
Start date August 2003 to September 2013.
50/50, 10% buy/sell advice.
GE result using yahoo monthly ADJUSTED closing prices.
AIM Up 75.8%. B/H Up 9.7%
Clive.
Hi Toofuzzy
Assuming no other income at age 60, a private pension that kicks in at age 65 of $10K/year and a state pension that kicks in at age 70 of $20K/year, and you can live off $50K/year then you might load up a bond ladder (step amounts) something like :
other
Age income bonds
60 0 50
61 0 50
62 0 50
63 0 50
64 0 50
65 10 40
66 10 40
67 10 40
68 10 40
69 10 40
70 30 20
71 30 20
72 30 20
73 30 20
74 30 20
75 30 20
2) Decide on your allocation between EQUITY (stocks) and FIXED INCOME (bonds, money market, etc) This may be your age % in FIXED INCOME
Hi Chiffle,
Investing £300 in stocks may involve incurring a £12.50 cost to buy (brokers fee), on top of which you'll have to pay 0.5% stamp duty. The market maker will also take a slice out of that (difference between the bid and ask prices). 5% of your money will disappear in just having bought some stocks. That's a hefty overhead. If later you need to sell those shares the round trip might have cost you 10% of your savings assuming the share price remained unchanged, worse if the share price had declined.
I'd be inclined to build your savings in a safe cash deposit account for the time being. You're young and will likely need some cash to hand relatively soon (next few years) and stocks are really only suitable for longer term investments (10 years+).
Gaining experience with stocks however is a valuable lesson, so perhaps rather than actually trading with real money, try paper trading (pretend money) for a while, looking into the actual costs involved, reading company reports etc. - which will stand you in good stead for later years when you perhaps have more surplus amounts that you don't mind locking up for the longer term.
You're definitely on the right track by getting into a savings habit from a young age. Over time I suspect you'll do well.
Best. Clive.
Hi Praveen
in 2008...I looked it up and treasury bonds were up 29%
missed ...
Hi Steve, you...
Will need to take a look when back home.
I think non-correlated assets will reduce volatility. Though, in 2008, everything dropped.
Year LTILG LTG BRK Gold Best Rest
1987 6.90 15.70 -5.76 -2.14 15.70 -0.33
1988 13.70 9.30 51.45 -11.88 51.45 3.71
1989 14.50 6.30 93.11 9.46 93.11 10.09
1990 4.40 6.10 -30.92 -19.56 6.10 -15.36
1991 5.20 17.80 36.14 -5.53 36.14 5.82
1992 17.10 17.40 29.83 16.30 29.83 16.93
1993 21.10 25.70 56.94 20.36 56.94 22.39
1994 -7.90 -9.50 23.00 -7.46 23.00 -8.29
1995 12.00 17.90 54.19 1.88 54.19 10.59
1996 6.50 8.20 7.51 -12.84 8.20 0.39
1997 13.40 18.10 30.02 -19.62 30.02 3.96
1998 20.30 23.00 50.97 -0.74 50.97 14.19
1999 5.00 -3.10 -17.39 3.57 5.00 -5.64
2000 3.10 8.70 33.14 1.79 33.14 4.53
2001 -0.90 1.20 12.04 4.34 12.04 1.55
2002 8.20 9.20 -7.77 13.46 13.46 3.21
2003 6.80 1.50 7.27 8.19 8.19 5.19
2004 8.60 7.00 -6.05 -3.08 8.60 -0.71
2005 9.10 8.00 1.37 31.06 31.06 6.16
2006 2.30 0.10 23.02 8.95 23.02 3.78
2007 5.50 5.10 20.74 29.24 29.24 10.45
2008 -1.20 11.70 -23.67 42.35 42.35 -4.39
2009 5.60 -0.80 20.53 14.77 20.53 6.52
2010 10.30 9.40 22.71 32.82 32.82 14.14
2011 19.90 21.40 -7.85 12.28 21.40 8.11
Recently (last week) Gold, Silver, and Copper seem to have drawn a lot of interest. I don't know why, and it was totally unexpected by me
Having a diversified portfolio in whatever form is a good thing especially if the components move up and down at different times.
The amount of annalisis you do never ceases to amaze me.
Tom runs his portfolio like an equity warehouse.
A different but somewhat similar approach might be to consider your investments as stacking the shelves of an isolated towns general store that you own. Ideally you want to have a range of goods to cover all eventualities. Umbrella's for rainy periods (or intense heat), sun cream and shorts, lip-salve and heavy coats ... etc.
10% gold will be called upon during times of extreme economic bad times. When 10% gold might double and double again and double yet again in value - maybe more.
10% long dated TIPS for periods of high inflation, low nominal yields.
10% long dated conventional treasury bonds.
10% cash (5 year treasury ladder perhaps, so some bonds maturing each and every year).
With that as the '40% bond' allocation, for 60% stocks you might opt for perhaps BRK, Small Cap Value and XOM/Energy providers/partners.
Since 1972 such a portfolio would have trashed the Coffee House (more general 60-40 stock/bond portfolio). Something like a 14% annualised compared to 10.4% for the Coffee-House portfolio.
Yearly real % gains (after inflation of (for 1972 to 2012 respectively)
9.46
-4.50
-19.47
13.67
37.24
8.71
4.66
28.86
12.96
-3.10
17.05
25.12
4.20
31.25
18.22
0.96
18.50
20.57
-10.85
19.69
11.05
16.48
1.38
25.62
7.18
17.60
13.92
-3.29
10.72
2.91
-1.09
15.78
9.70
3.09
16.32
10.61
-12.33
3.68
14.26
4.30
7.89
i.e. a reasonably productive/rewarding general store - that had goods on the shelves support both the greedy and the scared in the time of their need. Whilst there were the odd modestly bad year (or two), generally adjacent years either preceding or subsequent to those bad years compensated for those bad years.
Long dated TIPS might still be a viable buy even at current price levels.
Unlike conventional bonds whose price rise as yields decline, price declines as yields rise, with inflation bonds (TIPS) the price rises as REAL yields decline, price declines as REAL yields rise (where real yields = nominal yield minus inflation).
My guess is that low/negative real yields are likely to persist for a whilst yet, perhaps three years or more i.e. prices could remain relatively high for a while yet.
If real yields turn more positive again likely the economy will be doing relatively well, so whilst TIPS might lose, stocks might gain to counter-balance that and more.
If some nasty mess occurs and inflation spikes sharply whilst nominal yields are kept low, then real yields would move sharply negative and TIPS could soar in price. The Fed/Treasury would welcome such a sharp spike in inflation as that in effect erodes debt at the cost to savers/investors.
IIRC back in 1917, nominal yields were being kept down at sub 4% levels whilst inflation hit nearly 20% levels i.e. a -16% negative real yield. Under such conditions long dated TIPS might rise quite significantly.
The UK TIPS equivalent (index linked gilt) for 2055 currently has a modified duration (volatility) that is very high (35) which somewhat indicates that for every 1% change in real yields the TIPS price moves 35%. A modestly small holding of that, perhaps 10% to 20% could rise sufficiently to counter-balance the rest of the portfolio under such a high inflation, low yields environment. If in contrast high positive real yields occur and the 10% or 20% loses heavily, the 80% or 90% of other investments might be gaining sufficiently enough to counter those TIPS losses.
As a guide a 30 year TIPS bought when real yields for 30 years were +1% and when inflation was perhaps 2%, that then saw inflation spike to perhaps 10% might see the longer dated end yields decline to perhaps -5%. A 29 year TIPS priced to a -5% yield would generally have gained +400% compared to a year earlier (when it was a 30 year priced to a +1% real yield) i.e. $100 price rises to $500 price.
In the meantime, there's also sufficient volatility for the likes of AIM to potentially trade the (volatile) longer dated TIPS holding(s).
[FT250 = mid cap stock index, PHGP = gold, IL Treasury = Index Linked Gilt (TIPS)]
A benefit for US TIPS is that the repay at least par value, such that if during the lifetime there's overall deflation, then you get repaid par value - which is a real gain (purchase power has risen due to negative inflation over the period). If bought when priced to a positive real yield, then holding to maturity at least maintains purchase power. Or trading the holding potentially might lock in a real gain if during the holding period circumstances depict a sharply higher price. In the UK we don't have that repay at par option (if there's overall deflation the TIPS repay less than the par value, but that matches purchase power). Our benefit comes from taxation - as inflationary uplift element is non taxable, whilst in the US (depending upon which account they're held in) the inflationary uplift element is (I believe) taxable.
Clive.
RE: AIM In-Depth and SAFE
Hi Bill
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=2877757
Clive.
Hi Praveen
Year, Me, S&P 500
2005, +13%, +4.91%
2006, +14%, +15.79%
2007, +22%, +5.49%
2008, -40%, -38.49%
2009, +44%, +23.5%
2010, +22%, +13%
2011, -5%, 2.11%
2012, +13.3%, 13.4%
Hi K
Had a look and got similar figures to yours when using a AIM spreadsheet, but as you say it is not easy to think about cash as equity and equity as cash. and I've fogged out. A great idea, but it just doesn't feel right - and usually when I get that feel its because there is something wrong, but I've not managed to pin down what that might be.
That's much like a log scaling, where the share price will have to move in increasingly larger amounts the further it deviates from the median in order to trade. Which I guess is a bit like the halfway-to-the-wall approach.
Toofuzzy often has a much clearer mind and might be able to spot the Stewie if present.
Regards. Clive.
About percent cash. I'm one of those who thinks 20-30% is all you need for cash percentage for a diversified portfolio especially with ETFs, and I notice Steve has been doing the same. Sure there may be a time every 6-10 years when the markets drops and you run out of cash, but with the low interest rate at all other times the cash hurts your return. I bet if someone backtests this you'll get better returns with a lower cash %.
Back in 1984 I was finishing up studying for the Chartered Financial Consultant designation. In one of our investing textbooks I was introduced to what they called the "Constant Dollar" method of investing. Some call it "Constant Value".
Basically a person takes their initial investment amount and makes buys and sells around that value....always readjusting back to the original value with their buys and sells.
Residual Buys drive me crazy, I am not the type of person who likes to tinker much with something that is already working.
Re: CASH
I've just ran some figures and whilst to hand I thought I'd post them here as they might be of some interest.
Cash is often underrated as an asset. Consider cash to be a stock where the share price remains the same, $1 per share (note), and when deposited into a savings account pays a 'dividend' (interest). Based on Robert Shiller's data from 1871 :
Cash's 0% price change beat stocks (price change only) in 38% of years (i.e. stock prices declined in 38% of years so cash relatively won).
Cash invested in One Year interest rate earned a similar yearly average 'dividend' (interest) as stocks dividends. 4.7% for Cash, 4.5% for stocks. Higher yields were potentially available if cash were deposited for longer periods or from alternative relatively safe deposits. Cash's dividend was more volatile than stocks dividends (2.8% cash interest rate stdev vs 1.5% stdev for stock dividends).
The best year for stocks (price only) saw stocks outpace cash by 48% (i.e. stocks gained 48% versus cash share price gaining 0%). The best year for cash saw cash relatively outpace stocks by 92% (i.e. stocks declined -48% and 1 / 0.52 = 1.92).
Two quite different 'stocks'. One having stable price, volatile dividends, the other having relatively stable dividend but a volatile price. Which are similar characteristics of short and long dated bonds. Short dated bonds tend to have price stability, income volatility, long dated bonds tend to have volatile price, more stable income. Typically bonds investors will barbell both short and long dated bonds in order to help smooth both price and income volatility.
Whilst the compound gains from stocks are relatively clear, the benefits from cash are somewhat opaque and are often instead attributed to stocks due to confusing MAKE and SAVE. Stocks make clear gains, cash more opaquely saves you from otherwise larger losses and the proceeds from those savings are often subsequently attributed to better stock gains than would otherwise have been the case. Cash is like the midfield that work hard in order to help set up a goal by the striker (stocks). The striker takes all the glory for perhaps having done very little.
For reference the UK figures from 1900 are very similar. Cash beat stocks in 38% of years, averaged a 4.97% 'dividend' with a 3.8% std. dev., versus 4.52% average for stocks with 1.25% std. dev. 132% best year gain for stocks versus 122% for cash (stocks declined -55%).
Clive.
Hi Doug RE: ROR
Excel's XIRR is the common method to measure the return from varying amounts over time - but frankly I wouldn't put much on such figures. Better IMO to measure overall total performance relative to a benchmark for comparison purposes (total gains from stocks, cash, dividends etc).
If for instance you measure AIM's total gains performance relative to a constant weighted total gains benchmark you'll likely see little difference. If for example AIM averages 50% stock, 50% cash weightings over a 20 year period and you compare the total gains to a yearly rebalanced 50-50 stock/cash blend the overall results will tend to be similar.
So why use AIM and not an alternative approach such as yearly rebalancing back to target weightings (constant weighting)? - Because with AIM you're more likely to actually achieve the average gain whilst with other approaches you're more likely to lag the average.
Human nature when it comes to stock investing is weird. Investors who may be good grocery shoppers and will take a second item that is on a buy-one-get-one-free offer, or avoid buying if a particular product has doubled in price, will often take the complete opposite stance when it comes to stocks. Study after study highlights how many investors typically (and significantly) lag the average. Stocks might average 8% gains, average investors in contrast might average 3% gains (there are plenty of studies of that effect that can be found if you search around).
Stock shoppers have a tendency to avoid bargains and buy more when prices are high. At the 1999 high's for instance many were buying more stocks. During the 2003 and again the 2009 lows many investors sat idle or even dumped stocks. Investors are often their own worst enemy and may spend a lifetime of investing in a buy high, sell low like manner in practice, despite being aware that its better to do the complete opposite.
With AIM you can pre-calculate the share price at which it will next trade and it can even give you a close approximation of how much will be traded at that share price - so you could leave limit orders in the market to trade that amount at that price if/when encountered. Whilst AIM typically trades relatively small amounts more frequently and as such might cost more, those costs are relatively small when compared to looking to trade larger amounts less frequently on a manual basis, but then failing to actually follow through with such trades due to fear or greed - and at the worst possible times.
Measured on a mathematical basis and you may see little or no difference between AIM and alternatives. Measured on an actual gains basis and often you'll see that AIM investors achieve the average whilst alternatives often lag the average - significantly.
A little bonds added to an otherwise all stock portfolio can achieve broadly similar rewards to 100% stocks - but do so with less risk (volatility). Robert Lichello's final incarnation of AIM (AIM-HI 80% stock, 20% bonds (cash)) reflects that. Whilst the two will differ over interim periods, over the longer term the two will generally compare (on average). Combining that with AIM telling you exactly how much to trade, and when to trade, and overall you'll more likely achieve the market average and do better than many other investors who actually in practice lag the market average - but who may like to kid themselves that that was not the case. If for example you liked a 60-40 stock/bond choice but opted to AIM-HI that stock allocation (20% initial cash reserve), then overall you start with a initial 48-52 stock/bond weighting, are given clear indications of when and how much to trade, and might generally achieve similar rewards to the mathematical 60-40 stock/bond rewards.
Clive.
Toofuzzy
The Vealie method of 50% cash seems to fly in the face of that.
How would what you calculated compare to having a 80% cash sell side limit and a 20% cash buy side limit?
I've taken on board to target a longer term asset allocation as advised by the ancient Talmud, a third each in land (homes), commerce (stocks) and reserves.
Where reserves = cash = inflation bonds, cash deposits, treasury's, gold etc. and commerce = stocks.
For simplicity assuming $333K in each of land, commerce and reserves, either the commerce and reserves (stocks and cash) might be combined ($666K) and 50-50 AIM'd in a manner that doesn't tend to eat into cash too often/much (Buy Vealies), or the $333K cash might be kept separate and then AIM $333K of stock perhaps with 80-20 (20% cash) AIM settings ($266K AIM stock value, $67K AIM cash), and then perhaps manually rebalance the $333K cash and $333K stocks values back to 50-50 proportions manually whenever sizeable deviations have become apparent.
As Tom said earlier, having AIM make those rebalance decisions for you is probably better than manually making those decisions.
Clive.
I appreciate your hard effort here.
one could choose another Equity/Cash ratio than 50/50 and change the dynamics quite a bit.
Measuring risk adjusted returns would be helpful in getting an idea as to whether the increased risk exposure generated enough extra gain to justify the higher ratio.
Hi Tom
In these studies, are you letting AIM determine the buy and sell sizes when trades do occur? Or, are the trade sizes capped at a "return to ratio" level? In other words, can the buys and sells "overshoot" the ratio temporarily? or just resynchronize the ratio?
Hi Toofuzzy
How would what you calculated compare to having a 80% cash sell side limit and a 20% cash buy side limit?
Re: Buy side "vealies"....
This is the same as before for US Small Cap Value, but where twice the amount were allocated and the initial cash reserve was set to 75% and both buy and sell vealie's were set to 75%
One investor might have a third of their wealth in the family home (land), a third in reserves (cash) and allocate the remaining third to commerce in the form of a 50-50 based AIM.
Another investor might have the same wealth, but opt to combine both the commerce and reserves and apply that to the above AIM.
Both are following ancient Talmud like asset allocation/diversification (third each in land, commerce and reserves), but doing so via different approaches to holding the same underlying asset (small cap value).
I haven't really looked yet, but whether one choice is better than another ???
Re: Buy side "vealies"........
Hi Tom
I find it interesting that the peak value of the Nikki based portfolio isn't too far off the final value
Looking over the diagrams it would appear one could choose another Equity/Cash ratio than 50/50 and change the dynamics quite a bit. If one used 60/40 or 67/33 the performance would change, even though one's risk exposure would be higher on average.
Re: BUY Vealie's US Stocks since 1871
Monthly reviews, total gains (dividends and cash interest included)
First chart is a bit of a mess, but it does include the important data in the title of that chart
Data was sourced from Robert Shiller's monthly data since 1871
Just noticed after I'd uploaded and posted that the first three charts date values are corrupt. Dates span from Jan 1801 (1871.01) up to March 2013 (2013.03) - monthly granularity.
Re: BUY Vealie's
This image shows total gains data, assuming all dividends were reinvested into the stock as and when received, and VFITX for cash.
Same stock (SPY) data shown twice, one for a 1996 start date (prior to an up-run) and the other started Jan 1999 (close to a market peak)
Again settings of 50% initial cash, 5% min trade size (of PC), 10% SAFE, 50% for both buy and sell Vealies.
AIM with BUY Vealie's
Tom's normal (sell) Vealie is where rather than selling some stock when AIM indicates it to be appropriate to do so, and when cash reserves might already be at relatively high levels, you instead increase Portfolio Control by half the stock value amount indicated to be sold by AIM, without actually selling the stock. That helps slow the amount of cash reserves being built up such that you're less likely to become too cash rich, stock poor.
An opposite BUY Vealie might be applied where when instead of buying stock you just reduce Portfolio Control by half the stock value amount indicated to be bought by AIM, without actually buying the stock. Which might help preserve cash longer.
If you start with 50% cash reserve and set both buy and sell Vealie's also to 50%, then you'll only sell stock if cash reserves are less than 50%, but then stop selling once cash reserves are 50% or more. And you'll only buy more stock if cash reserves are 50% or more, but stop buying when cash reserves have declined below 50%. If however the share price continues to decline then the percentage cash amount will increase relative to the lower stock value, so if the share price dives deep enough cash might have risen to being 50% or more weighting such that an actual buy trade will occur.
That's quite a Ben Graham type AIM style, where generally you'll average around the 50% stock, 50% cash (bonds) allocation, but may see that deviate at times to upper and lower bounds.
For Japan since 1986 for instance, 33% lower, 62% upper cash reserve, 47.5% average. For SPY 32% lower, 67% upper, 49.7% average.
Historically for those two examples overall gains were reasonably similar to 100% stock buy and hold, but the drawdown's due to holding 50-50 stock/bond like exposure were significantly less deep and generally shorter in length. The figures however don't include dividends (which historically have generally been relatively little in the case of Japan).
Re Precious Metals
When real yields are negative, investors wont be too happy having to pay to lend to the treasury and will seek out alternatives. When real yields turn positive again investors tend to ditch gold and buy treasury bonds.
Treasury yield data sourced from http://tinyurl.com/q4jfpqt
For whatever reason foreign tax is taken out of SLW ( Silver Weaton a Canadian company)
Hi Clive, I can't find any info in TIP