... modelling further ...
Assume a crude general motion of a -32% share price drop from former highs, AIM signals a buy and we move all-in, as I defined a couple of posts ago. Thereafter AIM progressively sells around 12% of stock value per trade, until it's down to 36% %stock at which point another Bear hits (-32% price drop that triggers another AIM buy signal that has us move all-in). That's a compound 8 trades of -12% %stock reductions in a row to move from 100% %stock to 36% %stock. Assuming during the Bull period stocks achieve a 8% annualised real (after inflation) reward, then due to declining %stock during that Bull phase (AIM sell trades) we see reduced gains compared to all-stock, my figures suggest being up 56% compared to all-stock being up 100%. We miss part of the Bull gains, but then the next -32% Bear share price drop hits, where all-stock endures the full hit of that decline whilst AIM being at 36% %stock sees less of a loss, 1.56 former value dropping to 1.39 whereas all-stock is down from 2.0 value down to 1.36. Over the full cycle AIM ended marginally ahead 39% up versus 36% up for all-stock. Negligible difference but where AIM got there by holding a stock/cash type blend rather than 100% stock all of the time. Also, measuring the standard deviations in yearly changes indicates AIM having a standard deviation of 4.5% whilst all-stock's standard deviation was 10.9%. So primarily it looks like over full cycles the AIM based method achieved similar overall reward to all-stock, but did so with less risk ... i.e. the typical Sharpe like measure (that in effect is like dividing the annualised gain by the standard deviation).
That all assumes that cash just paced inflation.
Most of the time, during the Bull period, AIM lagged all-stock, its over the full cycle where AIM ends up with around a similar reward as all stock, but whilst having endured lower overall volatility and having been a stock/cash asset allocation blend rather than all stock. All stock buy and hold investors might opine that they care not about interim volatility and see it as just the same overall broad reward, where more often they had pulled relatively ahead of other stock/cash asset allocations, and they'd rather not be 'faffing around with all of that AIM monitoring/trading stuff'. However for those drawing a income stock/cash blends provide the opportunity to draw that income from the cash side when stocks are doing poorly, or from the stock side when stocks have performed well - optionality. And if 'cash' is invested whereby it achieves a > inflation rate of return, so those additional gains will enhance the overall portfolios rewards.
Clive.
News 
Market Data 
Discover 
