Hi Tom, Re Market Cycles
At the simplest level the concept tells use that sectors phase in/out in a rotational sequence of
Cyc, Tech, Ind, Basic Ind, Energy, Staples, Svc, Utils, Finance.
With Tech being the leader out of 'Full Recession' then the next in the set is Industrials during the 'Early Recovery' and Energy signifying the 'Market Top'..etc. As you say, AIM automates the actual identification of the actual phase.
With regard to diversification, I used to consider holding a single stock in each of a wide range of sectors, typically 15+ stocks, as being diversified, until someone pointed out the survivorship concept, that is historical price performance based measures tend to ignore failed stocks. My approach now is to hold a number of stocks in a much smaller range of sectors, around 4 or 5 stocks in each of 3 or 4 sectors. The principle being that if one stock fails in a sector, the remaining stocks in that sector tend to pick up on the failed stocks business (and potentially their assets at discount price levels).
As a simple example, say 3 stocks in a sector each priced at $10, making $1 profits - combined = $30 with $3 profit. One fails, the others pick up on the failed businesses trade and start making $1.50 profit and their stock price rises to $15. For the investor originally holding all three stocks they still have $30 worth of stock value and $3 profits being generated. As such the only cost of failure is a reduction down from 3 holdings to 2. If instead a single stock from a range of sectors is selected, then your more likely to hit upon unmatched failures and loss of value as a result.
Being more sector focused, as and when apparent cheap/expensive prices levels arise, sectors can be rotated in/out accordingly.
Did you see the 34% p.a. (20 year) average sector based strategy reference on the link in my previous message?
Regards. Clive.