A.I.M. Users Bulletin Board

[ls7550]

Fits well with AIM

AIM fits well with almost anything.

Consider for example a simple asset allocation of a third each in UK mid-caps (FT250) (as I live in the UK), a third in BRK (pays no dividends so no withholding taxes and provides exposure to £/$ currency moves as well as a range of large-caps) and a third in bonds.

I might AIM that using AIM-HI (20% initial cash) and a 40% allocation to BRK, and a similar AIM for FT250.

40% allocation x 80% stock (20% cash) = 32% stock i.e. close enough to the target 33.3% stock level. Historically for such a AIM the rewards were something like 8.7% with 25% average cash for BRK and 7.75% annualised with 20% average cash for FT250. That's with no cash interest considered (cash assumed to earn 0%). Dividing the AIM gain by the actual amount of average stock exposure over the total periods = (for BRK) 8.75 / 0.75 = 11.7%, buy and hold in contrast earned 10.3%. For the FT250 = 7.75 / 0.8 = 9.7% compared to 9.1% for buy and hold.

Broadly however those figures are likely no better or worse than had all three (FT250, BRK, Bonds) been held at a third weightings each, re-balancing once yearly. Yes over some periods one or the other might be the winner, but that can turn around over other periods. AIM is just a tool.

A benefit of AIM is that you just need one input - the stocks price. And its next trade price levels and amounts can be pre-calculated so you can even leave limit orders in the market to trade the indicated amount at those prices. Depending upon the AIM settings used it can trade more frequently than yearly reviews (higher trading costs), or it might trade less frequently (lower trading costs). You're more likely to actually trade using AIM than you are if you just yearly review as often with periodic reviews your emotions or beliefs (human nature) will sway to to make poor decisions (perhaps not (or deferring) adding to stock when prices had declined a lot in fear of further declines).

The other benefit of AIM is that over time it can have gone that little bit more in when prices were low and lightened up a little when prices were high; And it seems to broadly do so with reasonable accuracy. Relatively overweighting when prices were low, underweighting when prices were high can produce better rewards than maintaining a more constant level of risk exposure.

As I said AIM is just a tool. If you'd already decided that you wanted $50,000 exposure to asset A then you might allocate perhaps $62,500 to a AIM-HI. Alternatively you might be comfortable with allocating the $50,000 to a AIM HI and starting with $40,000 stock/$10,000 cash....or other choices of AIM settings. AIM will subsequently periodically suggest that it thinks its a good time to add, or reduce stock exposure - despite being given just one input - the share price.

AIM generally provides better advice than if left to your own devices. Whenever a bond matures or you have a chunk of cash, review your AIM's and it will suggest where best to invest/deposit that cash. When markets decline it will have you load more heavily into stocks. In contrast read around other boards and see who actually went to or near all-in during the 2008/9 crisis for instance. Generally you'll see more of cases of investors having sold out (done the complete opposite), only to later buy back in again after a strong rebound became apparent. In contrast here on the AIM board IIRC Steve (Grabber), Toofuzzy, Tom, myself ...etc were all at or very near having moved all-in during that downrun.

i.e. AIM generally works in practice. Many other methods in contrast work in theory - but end up with worse result in practice. AIM'ers generally achieve the 'average' in practice. Many other individual investors more commonly lag the 'average' (by something like 3% or so IIRC).