A.I.M. Users Bulletin Board

[OldAIMGuy]

Hi TF, Rebalancing is an interesting situation to consider. I took a look at the 11 year AIM histories of the 10 sectors of the S&P500 as a point of reference. "First place" in two categories, Buy&Hold and AIM, also had the largest cash reserve. Second place in those categories had the lowest cash content.

Interesting is that the third category I used to measure the "winners" was Portfolio Control Increase over the time. In this situation the Second place one moved back to First and the first place fund dropped to second place.

As a further note, #10 of 10 remained in all measures #10 (I should mention that dividends weren't included in this. The outcome might have shifted in the poorer performers). So, it would appear that the ugly performance of some sectors, almost no matter how you measure them, remains ugly.

Because each account is self-regulating in its Equity/Cash ratio by AIM, each should, in theory take care of itself. In this study the best performer turned out to have never run out of cash during the worst of the BEAR market. The second best ran out a bit too early. Now, which one will win in the next bull market? Probably the one with the higher Portfolio Control value since it will probably have the greatest value when it finally starts to sell shares. That means our second place finisher in two categories will probably be first in the next round.

If one started with equal values in each of these ten sectors (as I did with this test) after 11 years including the end of the previous bull market and the following bear period there were huge discrepancies between the lowest value and the highest. Best to worst ratios came out as follows:

 
 CATEGORY             RATIO 
 TOT. RETURN          2.36:1   
 ROCAR                2.21:1 
 BUY&HOLD             3.41:1 
 PORT. CONTROL VALUE  2.22:1 
 

It would appear that re-balancing after this much time had elapsed would bring more dollars to risk in the worst performer while stifling the potential of the best performer.

In my test Portfolio Control could grow by the usual AIM method of purchases and could also grow by "vealies." I wanted the steady growers to not be "out of favor" because of not doing much buying and only selling. What I found interesting was that with this method the relative rankings remained almosst constant. I guess we can't make silk purses out of sow's ears. So, whether our star perfomer got there by steady growth or by high volatility capture with AIM, should we be willing to take profits from Star and give it to Sow's Ear?

To be fair, the rebalancing should have taken place all along the way. It would take me some time to accomplish that with all ten spreadsheets and 11 years of history. I'll see what I can do.

In my own account, I do some "rebalancing" once in a while, but it's usually need-driven. When the family needs more income, I increase the allocation to the income producing side of the equation and reduce that portion dedicated to growth. I've also had an occasion of two when I've had a buyout occur and there's been extra cash available. This reallocation has occurred at those times, too.

JIBES has spent much more time at this study than I. Maybe we can get him to give us some comment.

Best regards, Tom