Hi Allen, Re: Incremental increase in Portf. Control................
1) in an upward trending year, this would help to maintain stock
inventory even as AIM would have been suggesting selling some shares.
2) in a flat trending market year, this would most likely not allow any
selling but would move AIM buy targets a bit closer as your example
shows.
3) in a down trending year, you would more likely approach and execute
AIM directed buys.
The biggest "risk" in short duration downturns is that our AIM settings
are such that we don't get any buy-back trades. The biggest risk with
either #1 or #2 is that we may leave our AIM engine with less than
appropriate cash levels for future market risk.
With the method I use, increasing Portf Control isn't determined by the
calendar, inflation or long term average growth. Mine is controlled by
market activity and perceived market risk. So, some years I might have
no PC increases (markets flat or just slightly down and/or more cash
than perceived risk).
After a severe downturn, I might not have any PC upward adjustments for
a while if perceived market risk remains relatively high (cash upper
target remains high compared to actual cash percentage). In another
scenario I might have several PC upward adjustments if risk were to
remain low and cash was adequate for perceived risk.
My market risk indicator of choice (the old idiot wave) hasn't been
perfect, but it's quite a bit better than flipping a coin. So, I weekly
recalculate the suggested cash level from my indicator and that acts as
a governor for my AIM selling activity. If cash is adequate I then bump
up PC by half any AIM suggested sells. That stifles the selling urge and
slightly raises the buy target. If risk accelerates upward, it frees AIM
to sell into any continued market strength (bull markets seem to last
longer in the face of rising risk).
A small buy cycle helps in two ways. It usually lowers market risk
assessment and reduces cash some. So, this allows either some more
selling or PC adjustments as indicated as the markets again turn upward.
This is a market driven alternative for allowing portfolio risk
to expand. It requires that cash is fully funded for either perceived
market risk or some other cash maximum target. It will not occur if cash
is below that target so therefore is less likely to leave the AIM engine
short of cash in a downturn.
Generally I have fixed upper cash limits for my bond and REIT fund
investments. For the stock market side I use a floating upper limit.
Those limits are what trigger PC incremental increases. It helps to keep
what I call the "Lichello Band" (Hold Zone) appropriate for the
investment as well as market risk.
