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Hi AIMster,
Good idea, I'll add it to the list. I'll have to give more thought to your second suggestion.
Thanks for the suggestions.
Hi Travail,
I'm not aware of anything similar to Tom's IW for the Canadian market. However, I ran a correlation between the S&P 500 and the S&P/TSX composite index (Canadian index) for the past 6.5 years (6.5 years was the most data I could get for the TSX) and the resulting correlation was 0.813 (which is relatively high).
This leads me to believe that the two indexes are fairly correlated and thus Tom's IW should be a good proxy for the Canadian market.
Having said that however, over the short-term I wouldn't be surprised if the Canadian and U.S. markets moved separately for short periods of time, but long-term they appear to behave in a similar fashion.
I hope this helps.
Hi Adam,
I'm not an expert on LD AIM, but I believe you can use any standard AIM software/spreadsheet to implement it. However there are no plans to officially incorporate it into AI.
Did you have any specific functionality in mind?
Hi Tom,
Sounds good. You're right, it should be interesting to see how AIMing the sectors individually compares with AIMing everything in one bucket.
"When I get back to Port..."
I've been reading your clues but haven't a clue on where you are, however I'll guess Texas.
If you're there, I'll be thunderstruck... "Went through to Texas, yeah Texas. And we had some fun."
Hi TF,
Thanks for the info. With all the different ETFs out there I figured someone would be doing that.
Hi Paul,
Another interesting study you might consider trying is to split the S&P 500 into sectors (I haven't looked, but I'm sure there are ETFs that you can use to do this).
Theoretically, AIM should perform better when each sector is AIMed separately because stocks in a sector tend to have high correlations with one another.
This means that the volatility should be higher, and since AIM thrives on volatility, you should see better results.
If you AIM sectors that cover all of the stocks in the S&P 500, you'd also be diversified (similar to AIMing the S&P 500 itself).
The drawback to AIMing the S&P 500 in one basket is that the stocks of which it is composed usually have lower correlations across the entire spectrum.
This effectively cancels out some of the volatility (which is good if you're not AIMing but not so good if you're an AIMer).
If you want to add another layer, use an allocation method (e.g. Modern Portfolio Theory or one based on the Sharpe ratio) to allocate your sectors. Then rebalance once your portfolios move more than 5% away from the initial allocation.
Essentially you'll be buying low and selling high at the individual ETF level (that's what AIM gets you) and also buying low and selling high at the portfolio level (that's what allocation and rebalancing gets you).
S&P 500 Simulation:
I've included results for VFINX below. The parameter settings are as described, except that there is no 5% interest on cash. I also note that you didn't include any trading fees (so I've omitted that too).
AUTOMATIC INVESTOR HISTORICAL ANALYSIS FOR VFINX
======= PERFORMANCE =======
Current Portfolio Value: $112,385.24 (859 shares owned)
Profit or (Loss): $12,385.24
Simple Return: 12%
Annualized Return: 2%
Buy/Hold Portfolio Value: $101,735.20 (964 shares owned)
Buy/Hold Profit or (Loss): $1,735.20
Buy/Hold Simple Return: 2%
Buy/Hold Annualized Return: 0%
Return on Capital at Risk: 16.02%
Average % Capital at Risk: 77.32%
Analysis run on 29-Apr-05
Monthly Price Data Chosen
Filters Used:
Include Buy Advice
Include Sell Advice
Exclude Hold Advice
Average Commission: $0.00
Start of Period: 31-Dec-98
End of Period: 29-Apr-05
High for Period: $130.9800 on 1-Sep-00
Low for Period: $68.7400 on 9-Oct-02
Initial Number of Shares: 675
Original Share Price: $103.6500
Original Share Price Date: 31-Dec-98
Original Investment: $100,000.00
Last Share Price: $105.4500
Last Share Price Date: 28-Apr-05
Average Cost Per Share: $95.70
Current Cash Reserve: $21,803.69
Current Shares Owned: 859
Current Security Value: $90,581.55
Number of Purchases: 7
Number of Sales: 16
======= CONFIGURATION =======
Buy Resistance: 10%
Sell Resistance: 5%
Initial Cash Reserve: 30%
Margin option is Off
Minimum Purchase: $0.00
Minimum % per Purchase: 0%
Minimum Sale: $0.00
Minimum % per Sale: 0%
Control Increment: 50%
Maximum Cash: 100%
Vealie: 50%
Volumizer option is Off
MACRO Filter is Off
Volume Filter is Off
MattMOD option is Off
Portfolio Control: 90,822
Hi AIMster,
There's an "Adjust Portfolio Control" function on the Tools menu that will allow you to reset the PC. You can do your trade as described, then go to the previous checkpoint to see what the PC value was before the changes. Then use the adjust PC function to reset PC to its previous value.
I think that will do what you're after. If I missed your intent, just let me know.
Thanks Don!
I currently have 4 allocation methods I like to use (the two built into AI and PI) and two others that are like those, but use the semi-deviation (or downside risk) rather than the standard deviation.
The big thing about allocation methods is testing them. It's much more difficult than testing historical returns (as there are many more variables to incorporate).
So far I've been mainly relying on external studies when choosing allocation methods (although the studies are not too shabby as they were done by a number of finance professors and 2 Nobel Laureates), but I do have a fleshed-out idea on how to test myself.
Now I just need to find the time to implement it on the computer and feed it data.
Hi AIMster,
Thanks for the suggestions. I'll add them to the consideration list (which is getting very, very long But, nonetheless, keep those suggestions coming.
Aimster, Jack, Don,
Thanks for the suggestions. I've added them to the possible enhancements list.
AI is as good as it is due to user feedback, so please keep the suggestions coming.
Hi Conrad,
It's been a long time!
Yes, I remember your suggestion. I think Tom Veale liked the idea too.
I haven't backtested it extensively. It does seem to work well with some stocks, but of course without further testing I can't say anything with certainty. However I think it is on par with optimizing for greatest portfolio value. If you do any testing on this, please post a note here and let me know what you find.
Hi Travail,
Winnipeg? I was just there last week for 10 days. Stayed downtown. Very cold. Very sunny.
On Thursday I saw Miss Saigon at the Pantages Theatre -- the lead actress is a local Winnipeg dentist, but the production was pretty good. Almost went to a Moose game when they played 9 days ago, but didn't quite make it (the Moose are Vancouver's farm team, so I would have liked to see Auld, King and some others who played a few games for the Canucks).
Hi Travail,
For me, the removal of the arbitrary 30% RRSP foreign content limit was the best thing in the new budget (which hopefully gets passed in the next few weeks).
Now I can properly diversify my RRSP without having to go through expensive clone funds. It also comes at a good time, with the loonie relatively high, so I can purchase U.S. shares at a fairly good exchange rate.
I will probably be looking at U.S. sector ETFs for this year's contribution.
Hello Jack,
Yes, that's one use of the Transaction history list (the green box at the bottom of the screen).
Another use is to view your portfolio as it was at a particular point in time. Just select the entry of interest and double-click on the line. Your portfolio will look just as it did on that particular date.
Hello Jack,
To do that you need to use the "Undo" function (on the Toolbar) to remove all of the transactions starting from the erroneous one (i.e. the one with the error and all that came after), re-enter the problem transaction and then redo the subsequent ones.
The reason is that a change in price and/or number of shares affects AI's recommendations going forward from that transaction.
If you simply edit the erroneous transaction, the subsequent recommendations would not be accurate.
Hello Jack,
Yes, when you update prices you will see a message stating that your MFs couldn't be updated and the auto-update will be ignored for that MF.
Hello Jack,
Currently that isn't supported. However there are plans to allow separate user accounts in an upcoming version. This is meant to support multiple users, however it can also be used to support multiple accounts for one user.
There is a (not very good) work-around for what you want to do, however. AI automatically opens the "aidb.mdb" file located in the folder where AI was installed. Therefore if you have multiple aidb.mdb files (e.g. aidbTaxable.mdb, aidbRRSP.mdb, etc.) you can simply copy them to the name aidb.mdb and then open AI. That account will then show up.
When you want to use another account, simply rename aidb.mdb to the appropriate backup name (e.g. aidbRRSP.mdb) and then copy the other account database file to the aidb.mdb filename (e.g. copy aidbTaxable.mdb to aidb.mdb).
It's a little bit of work and you need to ensure you backup the files manually (you also need to ensure you don't accidentally copy an old file over a newer one), however it will do what you want until the multi-account version is released.
Let me know if you have any other questions.
Hi Ksmurf,
I just replied to a post over at Tom Veale's BB. I haven't been receiving your emails (I suspect my SPAM filter).
Try sending me an email (mhing@automaticinvestor.com) and then posting a note here when you do. If I don't get it I'll check my SPAM folder and ensure your email address is on the whitelist.
My apologies for missing your emails.
Hi Tom/Ksmurf,
Tom, thanks for bringing this to my attention. I hadn't received any emails from Ksmurf.
Ksmurf, my apologies for the missed emails. I have a SPAM filter that usually works quite well in letting through legitimate email (I get over 1000 spam emails a day!). However once in awhile it does block legitimate emails. Perhaps it blocked your initial email and then added your email address to the spam list.
Anyway, AI works with any exchange listed at Yahoo! Finance (see http://finance.yahoo.com/exchanges for a list of exchanges). For the UK, you'd add the .L suffix to the ticker symbol of interest.
Let me know if you have any other questions. Also, send me a blank email (mhing@automaticinvestor.com) and reply to this post when you've sent it. I'll see if it ends up in my SPAM folder.
Hi Don,
Thanks for the post on correlations -- as well as the examples.
For those that don't know...
You should try to select stocks that have the lowest correlations between them. The AI Asset Allocator will show you the correlations of all stocks in a research portfolio, so you can quickly select the right ones.
When looking for low correlations it's best to use longer time periods (i.e. more historical data) rather than shorter ones. I like to use 3+ years.
Hi AIMster,
Okay, thanks for the clarification. I have added it to the consideration list. Don Carlson had a good suggestion for a summary too (Don, I received your PM but had already logged your suggestion from before).
Please let me know if you have any other suggestions.
Hi AIMster,
Thanks for the suggestion. When you say, "portfolio summary table," are you talking about the table on the Portfolio Manager screen?
If not, the main screen has a field called "#Holdings" in the "Portfolio Details" section that lists the number of holdings in each portfolio.
Since you can have the Portfolio Manager open at the same time as the main window, you can double-click on an entry in the Portfolio Manager table and see the number of holdings for that portfolio on the main screen.
Does that do what you want? Or are you suggesting something else?
If you could provide more detail about your suggestion I'd appreciate it.
Hi Aimster,
AI has the capability to export/import models as XML files, so people could post their models anywhere text is supported (including this board).
However I think the problem is that most people don't know how to go about correctly building models or don't want to spend the time doing it (although the concept is simple, it is a highly repetitive task that takes a bit of time).
I've been meaning to write a "Short Course on Model Building" for some time now, but haven't seen much interest in building models so have spent my time doing other things. My guess is that most people simply use the out-of-the-box models.
If you or anyone else wants to share models they've built, please feel free to post them here. Ideally there would also be testing results over a number of different market conditions so that people would have some confidence in the model's robustness.
Thanks for bring this up!
Hi Bosco,
I'm just doing this with the AIM board and AI -- not PI.
OT: I just read that this is the largest natural disaster since 1991 when a cyclone killed 130,000 people. The U.N. are gearing up to ask for donations on what will be a massive effort to help the survivors.
Apparently there are millions of people with no clean water, food or shelter and there's expected to be a second wave of deaths, among the survivors, due to disease and contaminated water/food.
I've been to a few places and saw first-hand some people that are so poor they barely subsist in the best of times; add a disaster of this magnitude and the odds are definitely stacked against their survival over the next few months.
I think that any donations we give can save some lives (even small amounts that most of us would think couldn't make a difference).
For those thinking about donating to this cause, I'd like to offer the following...
If you (or your friends) donate at least $197 U.S., before January 5th, 2005, directly to the Red Cross (Canada --> http://www.redcross.ca or USA --> https://www.redcross.org/donate/donation-form.asp -- if you're from another country go ahead and donate to your local Red Cross) I'll send you a fully registered copy of Automatic Investor 3.0 SP1.
Just specify that your donation goes to the "International Response Fund" in the U.S. or the "South East Asia Tidal Wave and Earthquake" fund in Canada and then email me (mhing@automaticinvestor.com) a copy of the receipt you receive from the Red Cross.
You can make the donation in your own name (so you receive your income tax receipt) and if your credit card number appears on the receipt, feel free to erase it before sending it on to me.
A year from now I'm sure we won't miss our donations at all, we won't have suffered any because of them and we might not even remember what we gave, but those same donations will probably end up allowing some people to ring in 2006 with us who would otherwise be dead.
Hi Tom,
I like the idea. Small Cap and Large Cap behave differently many times so it makes sense to measure them separately. That would certainly give a finer degree of control to people using the IW (however it would also mean more work for you
I currently use the IW to mainly measure market risk. If all components are showing low-risk, I will buy more than if they're not (and vice versa). So it would be helpful to see which IW (i.e. IW-smallcap or IW-Largecap) is showing what risk-level. That would allow me to gauge risk for the specific type of stock in which I'm interested (large or smallcap).
Hi Bosco,
Don's MACRO uses a long and short moving average. The long is 217 days while the short is 1 day (which is just the security price).
When the short crosses the long, either from above or below, the price change is sent on to AIM and the algorithm operates as normal. If no crossing occurs, the price is not sent to AIM (i.e. it is effectively filtered).
I hope that helps.
Hi Tom,
I remember when Nortel was beaten down a while back (I guess some might say it is still beaten down, I suppose it's all relative to where you buy), I was picking up shares for 73 cents CDN while everyone was running for the exits. Of course the IW was in an all low-risk state back then which isn't the case now, but still...
Hi RCB,
You can change the ticker symbol by selecting "Change Security Information" on the Tools menu. Once you've done that everything, including e!update, will work going forward.
You don't have to redo anything. Let me know if you have any other questions.
I also had a buy today at $2.15 CDN and will buy again if it goes below $1.80 CDN. They've had some tough times recently but their core businesses are sound.
The Canadian government also provides healthy subsidies, so that can't hurt.
Hi Bob,
Once you've used the Pragmatic Investor's Fundamental Analyzer to pick the best scoring stocks, the next step is to assess them as described in the digital book.
If it were me and I had 90 stocks that scored 7+, I'd categorize them by industry and then select the best 2 or 3 from each industry (with "best" being defined as described in the book).
Then for the ones that made it, I'd run them through the asset allocator (with at least 5 years of historical data) and check the correlations. Selecting a portfolio of stocks with low correlations between them would be next.
Finally I'd choose between 10 and 20 stocks (spanning different sectors and having the lowest correlations) and run them through the asset allocator again (using the "Stocks and Funds" option and at least a 5 year history) to determine the allocations.
Anything that was allocated as 0%, I'd drop. The remaining stocks would make up your portfolio. You'd allocate dollars to each stock as designated by the asset allocator.
This assumes you have enough money to invest in 10 to 20 stocks (I'd recommend at least $50,000 to $100,000 for 10 to 20 stocks). On the other hand if you don't want to invest that much, you can select less stocks (keep in mind that if you select less than 10 stocks you might not be sufficiently diversified, but if you have other investments, such as Real Estate, bonds, cash, etc., that might be okay).
I hope this helps. Let me know if you have any other questions.
BTW, can you post the stocks that scored 7+?
Hi Bob,
No, you have the current version. The Pragmatic Investor 3.0 is scheduled for release in the first quarter of 2005. My previous post was referring to some features that will be in 3.0.
As soon as PI 3.0 is released I'll send you an email so you don't have to worry about missing it.
Hi RCB,
The changes I listed in my previous post were for the Pragmatic Investor version 3.0, however some of these changes will make it into AI a little later in 2005.
If you have any suggestions I'd be happy to hear about them. Just send them on over to my email address.
Hi Charlie,
I got it. I've sent your unlock code. Let me know if you don't receive it.
Hi Charlie,
I don't have any outstanding registrations of which I'm aware.
When did you send your reg code? Go ahead and send it again and I'll make a point of specifically looking for it.
I know my spam filter has been trapping some legitimate emails recently so perhaps that's what happened.
Hi AH,
Yes, you're right about averages -- that's why the Median is used so often.
However the article I read was referring to averages, and while it may be skewed somewhat, I still think it shows the debt problem is not so good.
My feeling is that there aren't just a few people with million-dollar credit card debts while the majority have little or none. But your point is well taken and valid.
Hello Jack,
My sense is that certain investment vehicles are not right for some people.
I know what you're saying. I know a few people who shouldn't be in the stock market because they worry about it too much.
With Real Estate I'm a bit more comfortable with it than most people because both my parents were realtors and I grew up in that environment since I was nine years old.
However I also like the liquidity of stocks so it doesn't hurt to diversify across different investment vehicles.
Long ago I remember someone saying that if you want to invest in real estate you should aim to buy 5 homes, over the years, that each rent for the equivalent of 1/5th of the average annual salary.
Eventually, say over 25 years, they'll be paid off (mostly by the renters) and you'll have 5 clear-title houses that give you cash flow equal to the average annual salary (regardless of what inflation does). So not only will you have equity built up, but you'll also have a steady stream of cash flowing into your pockets when you're ready to retire.
I always thought that was a good plan (of course you have the hassles of renting and maintenance if you don't go with a property management firm).
I assume your friend it quite busy. Even the handymen over here are very busy -- to say nothing about the builders. We had 4 different builders come over (each for a couple of hours), look at the house plans and then leave with the intention of providing an estimate only to call and say they couldn't do the work because they were too busy (I still don't know how they didn't know this before spending 2 hours with us).
We're currently on our 5th builder who promises an estimate next week (so there's still hope
Hi AH,
If Bill Gates and Warren Buffett owe that debt, I'm not so worried.
Somehow I don't think BG and WB have any debt worries
I read a recent article that said the average American (and I'm assuming Canadian too) had 8 credit cards with a total of over $8000 outstanding debt. That's just credit card debt!
I can't imagine living like that.
Hi Tom,
That was an interesting article. Here's a link explaining what Warren Buffett has to say about the Trade Deficit --> http://www.freerepublic.com/focus/f-news/1053684/posts
I think there are two kinds of debt: good and bad. The bad is what many people have right now -- and that is using debt to purchase consumer (i.e. assets that decline in value) goods and services. I don't think anyone should have that kind of debt because it exposes them to all sorts of problems (from having to pay high interest rates, which takes after-tax money out of their pockets, to living paycheque to paycheque, which makes them very susceptible to economic changes, such as interest rate hikes and the like).
On the other hand, good debt is, well, good (when used intelligently). I'm a firm believer that if you have no bad debt and you're living below your means (i.e. your income covers all of your expenses with some left over for savings/investments) then you should have good debt (i.e. debt that is used to purchase assets that appreciate faster than the costs required to service that debt).
Examples would be a well-diversified basket of stocks that have been fundamentally checked and allocated properly as well as certain types of real estate (more on this in a minute).
The reason I like good debt is because it allows you to leverage other people's money to build your wealth. Of course it is possible to overuse even good debt and get into hot water, but the concept is that everyone should be trying to maximize their wealth building endeavors and good debt allows this to happen.
Now back to real estate... Many large cities have seen some tremendous housing price gains in the past few years. Coupled with a rising vacancy rate (partly because younger people are living at home longer and then purchasing more and more condos rather than traditional houses, not to mention the impending interest rate hikes -- I mean we're at historically low rates right now so it doesn't seem feasible that they can continue to drop), this means that the demand for houses in certain cities have to come down eventually.
Add to the fact that the baby boomers will start retiring very soon (and continue to do so over the next 20 to 25 years), means, I think, you'll see people start to sell their hyper-inflated houses, pull the cash out, and move to retirement cities and towns where they can use their stashes of cash to purchase more reasonably priced homes. This should have the effect of further decreasing traditional home values and raising retirement destination home values.
Others might also decide to keep living where they are (for whatever reason), but purchase vacation homes right now with an eye towards eventually retiring there.
I'm seeing this trend where I live. Many people are retiring here (actually many have already retired here, but they keep coming) and there are 5 houses on my street that don't have year-round residents. These people use their homes as a vacation property right now and plan to build their retirement dream house as soon as they can.
In my area, there is an abnormally high number of retirement dream-home construction going on -- so much so that I'm finding it difficult to find a builder to do an addition I've had planned for 5 months.
This only serves to drive up all prices in the area. As my uncle once told me many years ago, if you buy an investment property, ensure it's either a starter home or a very high-end home.
If the economy tanks, the average man-in-the-street will still need a place to live, so you will be able to sell (or at least rent) a starter home. And of course people who can afford the very high-end homes aren't usually affected by such economic events -- if they want to purchase a home, they'll purchase a home, regardless of the economy.
Of course most of us can't afford the very high-end homes, so that leaves starter homes. It's the ones in the middle that should have more problems.
So it seems to me that eliminating bad debt, using good debt to its full advantage, holding a well-diversified portfolio of stocks and/or ETF sector funds and investing in retirement area real estate (starter homes) before prices explode would be a good way to go.
At the end of the day house prices (and well selected equity portfolios) usually keep up with inflation (at least), you can always rent a house (since people will always need a place to live -- especially if they have just lost their house because of too many bad debts) and you can get other people to pay down the mortgage while enjoying the rise in value.
That's my plan anyway