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Yearly (since 1872) AIM (Classic) versus 50/50 yearly rebalanced TSM/TBM comparison
I assumed a 3.33% 30 year SWR, return of your inflation adjusted money via 30 yearly instalments, and recorded the final terminal portfolio value measured as a multiple of the inflation adjusted start date portfolio value.
Notable is that AIM was better in the worst case, still had 69% of the inflation adjusted start date amount available at the end of 30 years, compared to 51% for the more common 50/50 yearly rebalanced stock/bond approach.
Similar average outcomes, for which median is IMO a more preferable comparative figure, with both tending to end with around 1.5 times the inflation adjusted start date portfolio value.
AIM was more consistent, had a lower standard deviation in values.
The maximum (best) case outcomes were also similar.
What struck me the most was how over the more recent cases AIM whilst still having done OK, hasn't been as rewarding as 50/50 constant weighted (since the 1970's 30 year start dates). But that's subjective to your interpretation of "risk". Living another 30 years is a lowish probability for some, and leaving a larger inheritance is perhaps less important than the risk of a lower/bad case outcome, for which AIM, at least historically, was safer.
Why the difference? Because when I look at 1985 for example as a start year, that pretty much just sold shares, averaged 76% overall cash (having started at 50%) and ended with 83% cash weighting.
Clive.
Will do jaiml. I've hoarded PC's in the attic for too long and they need a clear out. Not the best environment (often wet London weather) - natural AC (drafty) :) so don't even know if they'll even boot up. The HDD's may have rusted.
Clive
1966 was a bad year to start retirement/drawdown, one if not the worst cases, after 4% SWR withdrawals ended 30 years with relatively little portfolio value remaining. AIM in contrast with a 4% SWR ended the 30 years with a third of the inflation adjusted start date portfolio value still available.
Stocks = S&P500 in the following image/data
Clive
https://www.signalpointinvest.com/team/ (Tom/CIO) has a more recent photo to the last mental image one I had in mind from a good decade+ ago
Has a longer history also :) 2008
In the article section, Sequence of Returns risk article, and another possible option is to phase retirement. Start your retirement portfolio/asset allocation a year earlier, with a third of the total retirement pot, than your actual retirement date, and just let the cash that throws off build up in your cash account. Then load another third in at your retirement date, and then the last third a year later, using the cash built up from the first loading along with some additional cash set aside as the income in-fill until you get to the end of the first year of retirement. Averaging in that way avoids lumping all-in at the worst possible time. Even a single year difference in start date can make a massive difference to final outcome. Combined with AIM like add-low/reduce-high, along the way and overall you're more inclined to hit a 'average' outcome that is good enough and is significantly better than the worst case outcome.
IIRC a 1969 retiree really struggled whilst a 1970 retiree did better. Similar for a 2000 retiree, having averaged in across 1999/2000/2001 or 2000/2001/2002 ... was better than having lumped all into retirement in 2000 alone.
Clive
DSCF looks like a somewhat AIM like style fund
https://disciplinefunds.com/faqs/
Hi Tom.
Here in London we have Investment Trusts, stocks whose sole purpose is to invest in stocks (bonds/whatever). Many of those permit degrees of flexibility and even incorporating some (typically modest) leverage (or de-leverage/cash).
PNL for instance (trustnet link) - whose primary objective is to protect and increase (in that order) the value of shareholders’ funds. Others such as FCIT have been around for over a century (FCIT is a world stock tracker type choice).
Comparing my AIM records for a stock/gold/cash asset allocation however with the likes of PNL and broadly AIM did a better job of dynamically adjusting weightings than PNL. Matched more like a FCIT/PNL blend (as a form of stock/bond type holding) rewards, with PNL alone type (reduced) risk. So as a manager, a simple robot (AIM) that was fed just price alone, did as well/better than highly paid managers (PNL's fees are a rather heavy 0.75%/year, so in fairness the managers might have added value, but fundamentally just paid themselves the benefits).
And with AIM you have full control, not at risk of a change in management/staff/policy.
As a retiree I could just hold PNL, or a FCIT/PNL combination, and draw a regular inflation adjusted income (SWR) from that. But I can in effect pay AIM what the managers pay themselves to run those funds, and AIM has provided just as good guidance historically, adjusted appropriately around the highs and lows. For me major stock funds are good enough, no need for sectors. REIT wise - well we have enough in home(s) value to not really warrant adding more exposure. Current and future inflation adjusted pensions add a solid foundation (could at a pinch get-by with just the rent having been paid (owner occupier) and pensions covering basic living expenses).
I do use a modified version of AIM however. I track inflation adjusted prices as that better levels things down IMO. I also have AIM trade less often, 20% SAFE, 10% minimum trade size amounts (trade larger amount less often). Even then I don't actually follow through with those trades, just on paper, and instead use the ongoing weightings as indicated by AIM at the time to adjust actual holdings once/year or so, similar to when others might be rebalancing back to their 60/40 or suchlike weightings, but instead to AIM indicated dynamic weightings.
One benefit of SWR style income withdrawals is that its inflation adjusted, so last years drawn $$$ income amount is increased by CPI, which is a comfort in times of high/rising inflation, when workers might be battling to get their wages increased in line with inflation. A risk there however is that your personal rate of inflation may very well be higher or lower than the change in CPI. Certain foods I like for instance (such as Genoa cake) have near doubled in price over the last year. I very much suspect that when it again becomes cheaper to buy the ingredients and heat the ovens required to bake those cakes that the prices wont halve back down again.
Clive.
Hi Tom
But also potential buy opportunities in the making.
Investing as a 'business' and a business with multiple product lines (stocks, cash, gold, whatever) tends to be more sustainable than a business with just a single product line (stocks). Bad times for one product line (sun-cream in winter, rain macs in summer) can be good for other product lines. And where AIM provides a ongoing indicator of appropriate amounts of capital to deploy into each product line.
Life is full of risks, no guarantees. Our business might go on to be worth multiples more in inflation adjusted terms decades later, or might falter/fail after 25 years of having provided a 5% inflation adjusted start date business value yearly income. As a business AIM/investing is one of the best, as you can work whenever and wherever you desire, typically requires relatively little effort, where the staff have all been replaced with 'robots' so no stressful personnel issues and where the business accommodation could be a simple portable shoe box.
Cancer for one can be the source of benefits to others - harsh but just a fact of life. AIM as a business is pretty much self directing, leaving our sole decisions pretty much being limited to just defining which product lines the business will carry. Beyond that and its more a case of just sticking our nose in once/month or so, just to ensure that the capital allocation manager and sales/purchase teams are keeping on top of their game and sign off (trade) their books.
Our business wont be the greatest performer, that is inclined to be awarded to those whose business carried just a single product line. Neither will it be the worst, again where that is inclined to be just a single product line. Generally however the tendency is for AIM to be up-there, closer to the best than the worst. Whilst many might opt for a business carrying a constant 60/40 rain-macs/sun-cream, AIM is more inclined to dynamically weight such that when you look back at its average weightings they were more appropriate according the circumstances endured than that of a fixed 60/40 (whatever) choice.
Best wishes.
Clive
Hi Tom.
The approach/concept I was outlining to Dan was a combination of lump-in and average-in, in around equal measure, but with the optionality to go all-in if/when stocks became relatively cheap.
Start with a conceptual target of a core 33% lumped in, adding another 33% perhaps averaged in over a decade to end at half having been lumped half averaged-in. But if prices dive deep enough go all-in.
For example AIM started in 2000 (stock high) that way (Vealies for all sell trades) had deployed all of cash by mid 2006 in a manner such that you ended with 1.5 times as many shares being held than had you lumped in at the start of 2000. Which could be considered as having purchased stock at a 33% discount compared to the lumper, or where if the lumper has a minimum 4% SWR potential, the AIM'ers minimum SWR potential was an effective 6% SWR.
That was for a relatively bad start date. In a stock do well situation you might lump a third in immediately, average in another equal amount over say 10 years, have started with 33/67 stock/cash, ended with 67/33 stock/cash, averaged 50/50 stock/cash. Over times when stocks do well, 50/50 portfolios also do OK (just not as well as if you'd been all-stock). But if additionally AIM has you at some point going all-in, in having followed all buy trades but Vealie'd all sell trades, then overall the rewards can be close to that of having lumped all-in from the start.
Basically start a AIM with 66% initial cash, Vealie all sell trades and once all of cash has been deployed you're done. You've bought in at a discount to 'average' and in so doing relatively outperformed the average - forever thereafter.
That's different to Term/Twin Invest which a pure average-in manager, doesn't automate the optionality of going to all-in. You could lump 33% in, Term/Twin Invest another third, keep a third in cash that you lump in if/when prices seem low, but that introduces human emotion/selectivity/manual-timing instead of letting AIM do the timing for you automatically.
Might not hit the lows, late 1929 stock peak start date for instance and all of cash was deployed 'too early', no cash remained to buy into the late 1932 lows as all of cash had been deployed by mid 1931. But still had 50% more shares than a late 1929 lumper, so lost less, recovered quicker. Would still have been uncomfortable in having gone all in to see further stock prices (halving again), but that relatively quickly recovered back up again, at least compared to a 1929 lumper.
Fundamentally diversification and averaging. A third immediately lumped in, another third averaged in, so combined lump/averaging rather than either alone, and a further third to lump in when prices dive deeply. Yielding better overall risk adjusted rewards. And all automated by AIM (with Vealies).
Clive.
Hi Dan.
As others have indicated with Vealies you increase Portfolio Control by half the amount of stock value AIM indicates to sell, and don't sell any shares.
Are you familiar with SWR, safe withdrawal rate? Commonly suggested as being 4%. i.e. at the start you draw 4% of the portfolio value as income for the first year, and then uplift that $$$ amount by inflation as the amount drawn in subsequent years. Which provides a regular inflation adjusted income (assumes all dividends and interest are reinvested, but obviously as part of actual management some/all of dividends and interest might form some/all of the SWR value being drawn, maybe with a surplus that gets reinvested into stocks, or where dividends/interest isn't enough and some shares are also sold to fulfil the $$$ amount being drawn).
That 4% figure reflects historic worst case measures and commonly is based to a 30 year time period. i.e. in the worst historic case after 30 years of a 4% SWR there was nothing left. But more usually (non worst cases) there was substantial residual portfolio value still remaining at the end of 30 years.
Buffett Paradox: Warren Buffet suggests all stocks for retirees who own their own home and have pensions covering base living expenses, but also suggests to cost average into stocks (save over years), or for lump sums to average-in rather than lump in, to avoid otherwise lumping in at the worst possible time. However buy and hold is no different to the daily cost-less lumping in each and every day.
Many Bogleheads suggest immediately lumping in, as that historically averaged better outcomes than cost-averaging in, but that overlooks the opportunity costs available when averaging in. Sometimes averaging in works out best, other times lumping works out best. Mathematically lumping in has the higher figure overall, but that excludes the option of averaging-in shifting to being all-in after declines. Imagine shortly after lumping in stocks drop 30%, the average-in investor might have only invested 10% and still have 90% cash that might then be lumped in. If the worst case historic 30 year period sustained a 4% SWR then having lumped in 90% at a near 30% discount then the supported worst case SWR rises to around 5.5% (at least conceptually it does).
However in other cases lump in works out best, so one approach might be to 50/50 lump and averaging-in. Start with 33% stock, increase that over years to 66%, and you average 50% stock exposure over those years. Similar reward expectancy as another who maintains 50/50 stock/cash by rebalancing back to 50/50 each year, but where you have less stock exposure in earlier yeas when 'sequence of returns risk' is considered the highest, more stock exposure in later years, but where dips in stock prices in later years is more inclined to just be giving back some of other peoples money (gains) rather than eating into ones own capital base.
If a newly retired starts with 33% stock, averages in another 33% over a number of years to have averaged 50% stock overall then likely they'll do OK. If they reserve the right to go all-in, if/when stock prices dive then having loaded all in at below peak levels they'll also likely do very well. But when to go all-in? That's where AIM automates things for you. Follow all buy trades, ignore all sell trades and sooner or later AIM will have you all-in at reasonable discounted average cost of stock such that the subsequent portfolio rewards are inclined to be good (avoided the worst cases). How can you set AIM to not sell shares? By using Vealies.
Conventional AIM has you both buy and sell shares, add-low/reduce-high type strategy. However it can be significantly better to not sell shares after having bought them at a discount. Start with 33% stock, end at 100% stock guided by AIM and in some cases the overall rewards can be substantially more than a lump-summer.
In addition to Vealies, how do you handle adding more to stocks each year. Well outside of regular AIM you simply increase Portfolio Control by the amount of additional stock value purchased. So if you start with $33K stock value, want to increase that by $3.3K/year for ten years (or whatever inflation adjusted equivalent value), then buying $3.3K of additional stock outside of AIM indicated trades and you increase Portfolio Control by $3.3K.
Just be careful with your emotions if shortly after starting a AIM stock prices crash and you're skipping around celebrating at having gone all-in, as others will think you're crazy. Further continuation of declines may follow to dampen your mood, however mid to longer term you're in a great position. Pretty much destined to do considerably better than average.
If no such dives occur, then broadly having averaged 50/50 stock is still inclined to do OK.
Clive.
Saw this on another board ...
Hi Toofuzzy
A number of years back I deduced volatility plays where around the equivalent of a 5x leverage factor, and that looks as though its continued to hold
PV link
Clive
Less than 0.1 USD/US gallon in Venezuela (subsidised)
https://www.globalpetrolprices.com/Venezuela/gasoline_prices/
Much the same here in the UK, around USD10/US gallon. IIRC 85% of which is taxation and contributes around 10% to national tax revenues. So if they reduced the tax for the relief of drivers they'd have to extract additional taxes from elsewhere. Could be a wise move given the knock on inflationary effect that the cost of transport has upon broader inflation.
Cutting off the largest land mass natural resources producer (wheat/oil/gas from Russia) seems more of a self harm action. After the 2014 Crimea sanctions Russian dealings in USD reduced from 90% down to 45% when they agreed with the BRIC's (Brazil, Russia, India, China) along with their African activities to trade in non-USD. Collectively around two thirds of the world population moving away from trading in USD. Clearance such as SWIFT relies upon upward through US and back down again transition, giving the US the power to cut off transactions - which isn't going down well and is inducing a move away from that structure to non-USD based alternatives.
What oil/gas Russia doesn't export to Europe, China's rising demand will likely more than offset. So seems to me that sanctions will just see USD based trading countries seeing high/rising inflation whilst Russia will just shrugs its shoulders at sanctions.
Part of the deal that ended the gold standard and the USD taking its place was that the US pledged to act responsibly, promises that were subsequently broken. A trickle of movement away from trading in USD could soon turn into a torrent, preventing the US capacity to export inflation (print/buy whatever it desired), leaving it much more accountable. I would imagine that the next primary trading currency will be some kind of Dixie like choice, based on a basket of currencies. Others say it might be something like bitcoin but my understanding is that the technical limitation of bitcoin can't handle anywhere near the volumes/speeds involved.
Clive
Hi K
Hi Tom
Bottom draw 10% of shares bought at the lows
Hi Tom/Toofuzzy
SWR
Kitces observed that the success/failure of 4% 30 year SWR had a high correlation to the first 15 years sequence of returns. If you achieve a 2%+ annualized reward in those first 15 years then the probability of success was far greater than if the first 15 years returns were poor.
Merry Xmas to you and yours also JDerb. And all. And thanks for all your regular updates throughout the year.
AIM of S&P500 real price is looking set to be indicating 53.7% cash (46.3% stock) for year end 2021. Appropriate for once yearly rebalancing 2022 year start target weightings.
Has the benefit that trading just once/year and cash can be in 1 year fixed term. For 'cash' a equal split between cash and gold historically provided better stock hedging (sometimes bonds hedged stocks better than gold, other times gold was better than bonds at hedging stock declines).
So rebalance to 46% stock (rounding) 27% cash, 27% gold and leave at that for the year.
Kind regards.
Clive.
Hi Tom
JD's reported ...
I suspect much of institutional inflow is a pure bet on Btc survivorship. Maybe something like this where if it does collapse losses are limited, if it sustains/does well then there's a upside reward potential such as if you change the start date in that link to 2015 to capture the 2017 case.
Clive
Hi Adam/jaiml
For Btc I'm seeing characteristics more aligned to 7.5x equity than to gold. So borrow 150% more than the capital you have available to invest and buy a 3x leveraged stock fund with that combined amount ... type 'bet'. Deleveraging and comparing to stock, and over the last 4 years
Stock Index Traded Options scaled to 10x exposure, 20% reserves might suffice just as well as Btc. Seemingly easy and great rewards when started from the likes of the post 2008/2009 financial crisis lows (1x stocks alone have yielded 15% annualised rewards since 2010). Sooner or later pretty much assured to fail.
Perhaps I should update my profile and revise Mike Masters saying to ..
AIM 'CASH'
The stock purchase power of cash is pretty volatile
but somewhat rangebound (mentally draw a line passing through the peaks and another for the troughs and that channel is moderately upward sloping within limits).
As the inflation adjusted share price index divided by the real cash price index declined, reduce cash to buy stock; As the ratio increased reduce stock to 'buy' more cash. Of course as directed by AIM.
Mostly that would have you heavily into cash, interspaced with some serious purchasing of stocks across dips/dives, and then averaging back into cash again as rebounds occurred. With the optionality of by the time the first 'sell' trade was being signalled (rebounding), you could sit back and say, nah! I'm going to desk bottom draw those shares bought at what is looking like a pretty good discount.
Clive.
Hi Toofuzzy
Hi Toofuzzy
50/50 Middle roads so will tend not to be the best, nor worst.
From 1990
From 2000
It's not unreasonable to consider a 50/50 stock/gold barbell as somewhat like a form of central currency unhedged global bond bullet. The progressions lines tend to wobble in a similar manner, but to different magnitudes.
Clive
Tulip bulbs lasted.
Governments all over the world will attempt to regulate, tax or even ban Btc use. There will certainly be a fight to resist its broad adoption. The Fed and the Treasury (and their global counterparts) are not just going to lay down as Btc increasingly threatens the monopolies of government money. Btc may last, but see its value re-aligned as did Tulip bulbs. Much is subject to acceptability, availability, ease of use, factors that states are likely to sooner or later target, I suspect in many cases offering their own preferred/legal alternatives backed by the domestic currency, regulated with audit trails - whilst Btc fades into a dark-web corner.
Hi K. S&P500/Gold and Dow/Gold do look cleaner when a log scaling is applied.
I used to use that log scaling (log stochastic) in past years.
Here's a posting from a decade ago https://investorshub.advfn.com/boards/read_msg.aspx?message_id=60907882
With a additional lump sum it would be reasonable to start afresh/separately with that money, average in according to relative valuations at the time.
If on having loaded all-in more usually there's no need to sell back out again such as at a apparent high, as often today's ceiling can become tomorrows floor. Once loaded in at a reasonable/fair/low price there's no need to look to further average that down at the risk of perhaps losing the already locked in benefits.
Clive
We have (or at least did so until recently, I think its been pulled in having achieved its primary objective of having ousted President Trump) a comedy channel over here in the UK called CNN, where the main stars are Joe and Nancy and they do thing like rig votes to their advantage. I think it arose out of a older TV series called Spitting Image where puppets caricatured British politicians and Royalty. The CNN version doesn't have as life like looking puppets however, just look too plastic. The comedy is relatively dry, as are the story lines - such unbelievable things as a US president who dodged military drafting six times. Little wonder that naval exercises had a single French sub pretty much devastate the US navy, and US/British troop exercises having to be reset/restarted after just a few days due to the elimination of nearly all US troops/assets.
Hi jaiml
In that set of charts I'd set dividends to be added to cash to see differences to that of reinvesting dividends, the differences were small/negligible. So the cash value increased as dividends got added to cash. Basically I posted the wrong charts, but other than that cash rebuild had very similar appearances/outcomes.
My recent studies are indicating that AIM of real S&P price has become more positively biased and hence higher cash being indicated due to post 1985 US dividend tax changes that led to more of earnings being retained. Looking like Dow/Gold stochastic is the better choice since the 1980's. Basically the lower historic Dow/Gold ratio value is near zero whilst the upper is near 40, so a quick guide is ( current - 0 ) / ( 40 - 0 ) ... or simply current Dow/Gold / 40. With Dow at around 36,000, gold at 1800 = Dow/Gold of 20 and a stochastic of 20 / 40 = 0.5 (50% cash). If the Dow/Gold hits new highs, say 45 then the divisor is changed to that.
Increasing the trade signals seems to work well, SAFE=0%, min trade size $1, throws off more/faster buy trades and has you all-in quicker. In effect buying into each pull-back. If historically the worst case peak to trough that resulted in 4% SWR sustaining 30 years then if you can average in at a lower than that peak, say 5% less, then the conceptual SWR rises to 4 / 0.95 = 4.2%. More relevant however is that Dow/Gold can indicate when prices are relatively high and keep back more cash such that if a big drawdown does occur relatively soon after purchase the cash can significantly dilute down that hit, and early year dips (SORR) is more critical than big dips after a number of years when reasonable gains might already have been achieved (give back of other peoples money rather than a hit against ones own capital).
I'm seeing a wide range of how long before all-in occurred, in cases of where low stock/high cash was initially indicated and a sustained Bull period followed then cash could have lasted for many years. In other cases typically after declines after starting cash could be burnt through quickly. Generally I'm seeing AIM tending to do better than lumping in if bear/bunny periods followed, in some cases with considerable/large differences in outcome, or near comparing slightly lagging if a sustained Bull period followed initialisation. At least when initialised to Dow/Gold stochastic based initial stock % (cash %) weightings.
I've also been testing gold, but where the stochastic is reversed for that i.e. 1 - stochastic for the amount of cash% value (or read the stochastic value to = % amount of gold to buy).
When SAFE and MTS are pretty much discounted, it pretty much becomes a PC - SV (or SV - PC) buy (sell) type monthly review/measure/indicator (where actual sales are ignored and in both cases (sell or buy), PC is increased by half the indicated trade size amount. Quite a nice simple method, more so with the simpler Dow/Gold value divided by 40 type stochastic indicator calculation method.
Purely by eye back in the late 1960's the Dow was around 900 whilst gold was around 35 so a Dow/Gold ratio of around 26, which was around a new high in the Dow/Gold ratio so the stochastic was pretty much indicating 100% cash. AIM wont work with zero stock value (PC=0, SV=0 unchanging), so dropping say 10% into stock to get AIM up and running would have been reasonable. As per that above Dow chart link the Dow then dived up to the mid 1970's so you'd have averaged in all that cash during those years whilst having minimised drawdowns compared to all-stock.
1999 and Dow was very high, gold was very low, so a high Dow/Gold ratio. Again seeing the Dow/Gold ratio breaking through into new historic highs, so low initial %stock exposure (high %cash).
Early 1980 and Dow/Gold ratio was down near 1.0 levels. So a very low %cash would have been indicated, near/at all-in from the offset and that partook of the great 1980/1990 up run in stocks.
More recently and its pretty much saying neutral, 50/50, no clear/obvious over or under valuation. So half lumped in, the other half averaged in progressively at pullbacks.
Clive
And bitcoin will rise to become a stable primary reserve currency with each coin worth trillions whilst the US economy collapses in having lost primary reserve currency status. Or maybe not! I suspect not.