Hi Ray, Re: Doug B's latest AIM article and Doug K's comments.............
Thank you for bringing this latest article to everyone's attention. As usual, Doug B has done a very thorough job of digging into what goes on under the hood of the AIM vehicle. As with tuning any system, it is good to look at the effect of each change individually but also important to look at the overall performance of all changes combined. Here, Doug B had done a good job answering some questions that come up when new AIM users start to get some experience with Mr. Lichello's AIM.
Adam's recent question of when 'vealies' might be used with individual stocks/funds or for a collective cash reserve is addressed indirectly here as well. I'd looked at the '90s tech bubble period when I first considered what should be the maximum total cash as well as individual investment cash. During that period, Tech outperformed essentially all other sectors by a wide margin, much as the Energy sector did in Doug's thesis. If one used 'vealies' on the Tech sector and capped cash buildup there, the portfolio grew considerably better than if AIM had been allowed to sell at every signal. However, the 'vealies' constraint on cash buildup kept it from having enough percentage of cash to survive the eventual popping of that bubble. This would have been true of the Energy sector during this Millennium, too.
The biggest problem seems to come when we move to do the buy side of AIM after a specific sector bubble. Will we be willing to borrow from Peter to pay Paul in a severe downturn? How do we know our cash dollars are being best spent in a pooled cash environment? Further, if we're attempting to compare our results to a specific index as a benchmark and we let our portfolio's weights vary from that benchmark through AIM's activity, how will that affect our comparison?
Doug K's comments address the concept of expanding the risk (Portfolio Control) artificially in a way similar to the 'vealie.' I think the benefits/risks could be put to test, but would vary too much with individual stock/fund selection for the analysis to be meaningful. I've used a maximum cash reserve at a fixed level for most of my income producing investments at various levels from 15% to 30% maximum for probably two decades. This has worked well enough. On the "growth" side, I've used a variable maximum cash level based on my market risk indicator. I've used this method quite a while, too.
I've never considered the 'vealie' a "restart" of AIM, but I guess it could be. In Doug K's example, each and every sale seems to generate a "restart." With the 'vealie' I bump up PC but then when the cash has been diluted, I resume selling to bring the cash back to the desired cash max. So, my method intersperses "restarts" with normal AIM sales, I guess.
