Hi Allen, Re: PC incremental increases.............
I've always thought of the upward PC adjustment of the original AIM as positive feedback. It is 'positive' for several reasons, but is basically a reward system for good behavior. We're patted on the back for buying stocks/funds when they're are out of favor and a relative bargain. So, we're allowed to push the risk envelope out a bit so, in the future, we can capture more profit. This seems to work fine with AIM even if it's a terrible idea for Cruise Control in a car. The "vealie" carries that thought a bit further as it expands the risk envelope, too. When cash is plentiful relative to market risk it allows the portfolio to expand in small amounts while keeping the cash reserve fully funded.
I really like the idea of indexing the PC value on stodgy old income funds. They tend to trade in narrow bands with only small variances outside those bands. Some of mine don't trade even once every year or two. If one is accumulating dividends in cash, this tends to eventually get the equity/cash ratio too heavy on the cash side. I prefer AIM direct accumulated dividends into the purchase of more shares. Those who do DRIP or dividend reinvestment probably already raise the PC slightly with each reinvestment. So, for those of us taking cash, the idea of pushing up PC slightly makes good sense. I'll still be buying on AIM directed signals which will be discounted from previous sales or vealies. My plan is to increase PC annually by the percentage of annual distribution. High dividend payers like junk bond funds will get the biggest increases while shorter term treasury funds will only get small ones.
I've never attempted to test PC decrease during declining markets. It seems contrary to our efforts of accumulation, however. It would require some study.
I've always felt that an AIMer's goal was to become 100% invested at or near market bottoms as often as they come along. While long and deep market downturns aren't fun, they do offer AIM users the opportunity to actually become fully invested. The rest of the time we're working under the handicap of carrying cash as an under-performing asset. It's always a compromise between performance and safety. How much insurance is enough and how much is too much? We get paid very well when we "round trip" some cash to stock to cash. That has to compensate for our patience in holding cash for long periods.
