A.I.M. Users Bulletin Board

[ls7550]

Hi AIMStudent

AIM'ing at the lowest price does not beat B&H starting on same date (over selected datasets.)
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Third panel is AAPL over 37.6 years, not allowing cash to go negative

You might like to have a look at not letting cash go negative, or even indeed not letting cash (bonds) decline below certain levels. Many investors are content with rebalancing to 50/50 once yearly, generally accepting that such a asset allocation may likely lag 100% all stock. Benjamin Graham advocated 50/50, but with the added option of ranging between 25/75 to 75/25, according to "valuations". But how might one "value" whether its appropriate for 25/75, or 75/24 ... or anywhere between? Well that's where AIM helps. If you set up AIM to work along those lines then the rewards can be, in Graham's terminology 'satisfactory'.

This PDF extract shows two AIM's, one for the US S&P500 (US$), the other is for the UK midcap (small cap in US scale) (GB Pounds).
https://drive.google.com/file/d/1qF8XSeJlkkHc7waAU_GGTYW4aDveEsJD/view?usp=sharing Different times, different currencies/geopolitical risks etc. and mid to longer term the rewards were 'satisfactory'.

If you're prepared to go to 100% stock, and perhaps get stuck there for years such as can occur with base AIM, then you might as well just go with 100% stock from day 1 (buy and hold). But for many, being 100% stocks and seeing stocks dive deeply, perhaps stay down, at a time of life when income is also being drawn/spent ... isn't advisable. Even with some bonds (25%) combined with cash interest and dividends being received those bonds/income streams might float the portfolio through such a depressed stock prices period when a income ('pension') is also being drawn.

Even for accumulation, a stock/bond blend can at times see the overall gains align to 100% stock, typically after stock declines, and those alignments can repeatedly occur decades into the investment period. Whilst stocks might pull ahead for years, if at some future date 100% stock realigns with a stock/bond blend then at that point in time the total gains are the exact same, there was no benefit to being 100% stock.

Stocks are typically leveraged (broadly) i.e. involve debt. Leverage scales up the volatility, but typically doesn't really add any additional gains mid to longer term (broad average). De-leverage stocks (70/30 for instance) and 100% stock might zigzag around that https://tinyurl.com/yx6d2qc2 Reduce stock further, to 50/50, and periodically 100% TSM might periodically dip down to that https://tinyurl.com/wcjxepo Reverse that back up again by using more volatile stocks, such as Small Cap Value, and along with AIM rebalancing between 25/75 to 75/25 type levels according to 'valuations' and you might see total rewards mid to longer term compare to that of 100% stocks in a more regular/consistent manner.

But yes, for some stocks, such as AAPL that added 22% annualised CAGR as per your table/figures a 70/30 AIM will tend to reward less (18% CAGR as per your table/figures). As might AIM see comparable overall rewards if/when AAPL sees a sizeable correction and at which time AIM will have provided the same overall reward as 100% stock exposure.

AIM'ing at the lowest price does not beat B&H

No it wont, never will. What matters more however is the broader picture where a AIM that averages 50/50 might accumulate to provide rewards that compare with 100% stock - better risk adjusted reward (or for many, having some bonds to call upon to float income provision across times when stocks might be down a lot).

Clive

PS for reference, within the above PDF the second AIM shown uses the FT250 index as its 'stock'; The UK FT100 index is the UK's 100 largest (by market cap) stocks, whilst the FT250 is the next 250 stocks after that (mid caps). 1986 to 2018 and a AIM of FT250 that averaged 56% stock (44% 'cash') bettered 100% invested in the 'main' index (FT100) by 2% annualised ... total returns (including dividends/interest).