Safety of AIM.
AIM is safe by nature/default. For many, too safe. If you want to increase risk and tendency to average more stock exposure then you could uplift PC by the amount of dividend value of dividends received, or by inflation ... or whatever.
AIM is better for retirement than accumulation. For accumulation more often simply buying more stock/shares out of surplus wages as and when that money becomes available will tend to generate the highest value.
Consider Alice who in coming up to retirement might opt to solely hold cash (deposited to earn interest that might broadly offset inflation), and spend 1/33 of the value in the first year, 1/32 in the second year, 1/31 in the third year ...etc. A form of 3%/year spending rate, and where after 33 years the money is all spent. Bob in contrast might opt to hold all stock, spending the dividends, and where the dividends might also provide a 3% inflation adjusted type income, but where the stock value also tends to broadly rise with inflation such that after 33 years they might still have their entire start date value still intact in inflation adjusted terms.
Carol might opt for a choice somewhere between Alice and Bob’s choices, some stock, some cash. But how much? Common choices are 50/50, 60/40, 66/33 ...etc. and they’ll often constant weight to those levels - for instance rebalance back to 50/50 once/year. If you measure outcomes over historic periods there will be a optimal choice, such as 46/54 or whatever – but that cannot be known in advance. With Lichello’s AIM however the results over time tend to see AIM converge towards that overall historic average optimal level. If 45/54 was the optimal historic measure, then AIM over that same period might see its actual average stock/cash over the period close to those figures. AIM is a form of ‘Variable Weighting’ style – rather than using a Constant (fixed) Weighting, and where more often AIM’s overall actual average Variable Weighting level is near optimal in reflection of how stock prices actually moved over that period.
Another factor is timing of rebalancing. When to reset back to 50/50 or whatever proportions. Once yearly perhaps? Not at all? Well again AIM tends to be better than average, it indicates amounts to be added/sold at times and in a manner that was better than had you not rebalanced or used fixed yearly rebalancing. AIM is not always the best, but more often than not it is. Yet another benefit of AIM is that its trades are modest enough to be more inclined to actually be followed. Many investors who for instance are due to yearly rebalance at coinciding time of deep stock price declines more often opt, due to fear, to not rebalance. They fear greater stock losses to come, and in failing to rebalance they often lose out and look back with regrets of the missed rewards from having failed to rebalance. AIM has us more inclined to have appropriately rebalanced, albeit more often via several trades one after another rather than a single large amount at a single point in time.
A significant risk for a investor who opts for all-stock/spend dividends is what they call Sequence of Returns (SoR) risk. If you were hoping to draw $40,000/year from a $1M portfolio i.e. 4%, but soon after lumping into stocks, share prices halved, then to support the same desired levels of income the portfolio has to support a 8% withdrawal rate – which is much more inclined to result in failure. SoR risk tends to be more critical in earlier years than in later years. Standard (original) AIM of 50/50 initial stock/cash has SoR risk much less of a risk.
In the broad average case the characteristic of AIM is to start with 50/50 stock/cash, and end perhaps 3 decades later with 25/75 stock/cash. Averaging around 37/63 stock/cash overall. i.e. it tends to be a ‘cash cow’, tends to be more of a constant stock value type character. It’s often suggested to hold less stock, more bonds (cash) with age, and AIM broadly tends to do that. But again not always. If SoR risk becomes a reality in earlier years so AIM will tend to increase stock exposure - potentially significantly, perhaps even at times moving all-in on stock (no AIM cash remaining). If the historic optimal choice of stock/cash over the years tends to be for a high stock proportion, so AIM will naturally have tended towards that.
For AIM here, we assume a standard approach of ignoring cash interest and ignoring dividends - we spend those. Our AIM just looks at stock price only, and a fixed cash level of cash (and where AIM trades periodically add to that cash by selling some shares, or uses some of that cash to add more shares). That combined stock value and cash will broadly tend to keep up with inflation over time, even though the natural/average tendency for AIM is to see fewer number of shares being held over time. AIM stock value and cash broadly keeping up with inflation is similar to what a all-stock investor might expect/achieve when they are spending dividends, but where AIM achieved that outcome without the level of early year SoR risk that a all-stock investor endured and in holding less overall average stock exposure, and after having spent all dividends and cash interest.
For retirement AIM is a great portfolio manager. It better ensures you ‘rebalance’ in a appropriate manner and at times that more often were better than periodic rebalancing or not rebalancing; Has significantly lower early year SoR risk; And will steer the portfolio towards what later proves to be near the optimal overall stock/cash weightings.
50/50 initial stock/cash AIM weightings; 10% SAFE, 5% to 10% Minimum Trade Size settings; Review monthly or even quarterly, monitor the share price only; Trade (rebalance) whenever AIM indicates; Spend/withdraw any dividends/cash interest into your cheque/check account for spending. And in 20, 30, whatever years time likely you’ll have a AIM portfolio with comparable inflation adjusted value as at the start.
Clive.
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