Monday, February 12, 2018 4:46:27 PM
Hi JD, Re: v-Wave Scale and range.............
I've been fiddling with the overall scale and range of the v-Wave to see if I can find a more responsive and appropriate range. I have felt that for individual stocks and also diversified stock portfolios it was always a bit too conservative for reasonable long term performance.
After some effort, I came up with a median value of 45.75% cash as being suitable for individual company stocks. That could be adjusted by BETA of the stock in question if one wanted to.
I then calculated the standard deviation of all the data from 1982 to the present. That gave me a range of 38.23% and below Low Risk and 53.27 and above being High Risk. Here's how it would look in more recent times:
Then, to see if this made sense taking into account the 2008-09 meltdown I created a longer term graph:
(03/09/2009 Low = 12.88%; 02/02/2018 High = 56.26%)
Note I had to change the indexes to Log scale to make any sense of them. Here we see the v-Wave plunge to around 12+% back at the double bottom during that terrible downturn. I think this helps put some perspective on what we've seen in the last two weeks. Also, it puts the current v-Wave value at just 51% cash suggested or just below the high risk threshold but also above the median value. It's still quite conservative but maybe a bit more realistic.
Take some time to think about these changes. Let me know if you feel this is a more appropriate look at market risk relative to cash for AIM. If the consensus is that this makes more sense, I'll send you a copy of this modified spreadsheet for future use.
As with the current v-Wave, the values shown would be divided by 1.5 to come up with appropriate cash levels for diversified equity portfolios, mutual funds, etc.
I've been fiddling with the overall scale and range of the v-Wave to see if I can find a more responsive and appropriate range. I have felt that for individual stocks and also diversified stock portfolios it was always a bit too conservative for reasonable long term performance.
After some effort, I came up with a median value of 45.75% cash as being suitable for individual company stocks. That could be adjusted by BETA of the stock in question if one wanted to.
I then calculated the standard deviation of all the data from 1982 to the present. That gave me a range of 38.23% and below Low Risk and 53.27 and above being High Risk. Here's how it would look in more recent times:
Then, to see if this made sense taking into account the 2008-09 meltdown I created a longer term graph:
(03/09/2009 Low = 12.88%; 02/02/2018 High = 56.26%)
Note I had to change the indexes to Log scale to make any sense of them. Here we see the v-Wave plunge to around 12+% back at the double bottom during that terrible downturn. I think this helps put some perspective on what we've seen in the last two weeks. Also, it puts the current v-Wave value at just 51% cash suggested or just below the high risk threshold but also above the median value. It's still quite conservative but maybe a bit more realistic.
Take some time to think about these changes. Let me know if you feel this is a more appropriate look at market risk relative to cash for AIM. If the consensus is that this makes more sense, I'll send you a copy of this modified spreadsheet for future use.
As with the current v-Wave, the values shown would be divided by 1.5 to come up with appropriate cash levels for diversified equity portfolios, mutual funds, etc.
Best regards,
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