The "Stock Trading Riches" Investment System

[ls7550]

Hi Nick

Looking at that backtest data, and its the combined gain + cash expansion growth rate that is the figure that should be compared. Buy and hold all stock 7.44% versus 3.93% constant inflation adjusted value (CIAV) along with a 4.2% cash expansion rate = 8.13%, so around 0.69% more. For the AIM that accumulated more cash (less average stock) the figure is around the same, broadly comparable (less growth, more cash).

Fundamentally income being provided from stock dividends, cash interest and possible real gains on top (ahead of inflation) that might be top-sliced/spent.

A difficulty with top slicing is identifying when and how much to top slice. We might however for instance just run CIAV purely against the stock price (exclude dividends) and cash without interest included, and spend all of the dividends and cash interest. That CIAV will have a dynamic stock/cash weighting over time and if our actual cash to stock ratio has a higher percentage cash level than the CIAV then we can also spend the difference. Thereby providing a automatic means to determine how much 'top-slicing' is appropriate (the 'how much' element). The 'when' element could be as simple as - whenever a fixed rate bond/holding had matured and we had actual cash in hand.

On the assumption/basis that AIM and CIAV can yield comparable rewards/benefits, of the two CIAV/Praveen's STR method is the easier to grasp/manage IMO. Keeps things simpler for heirs that may have little/low interest to pick up and run with.

Fundamentally with buy and hold you compound more gains as that retains more shares. With CIAV and more so with STR and perhaps even more with AIM you see greater levels of cash throw off/spending. Where CIAV/STR/AIM are broadly similar, and that yield a better overall benefit than buy and hold in combined growth + income terms. But perhaps little different to just simple 50/50 yearly rebalancing (that will tend in contrast to accumulate more growth, provide less income). All very broadly speaking.

When you're spending dividends, cash interest and surplus real gains (top-sliced) then your income streams are diversified. It's only natural at times that those individually will rise and fall. With lower cash interest so stock prices might be expected to have relatively risen, such that real gain top slicing might have risen, but where cash interest had fallen. Yes, maximising cash interest is also beneficial. Reasonable choices for 'cash' IMO are the likes of the Permanent Portfolio, or a third each in stock, gold and cash.

https://tinyurl.com/y9qghjjm

I visualise stock/gold 50/50 as being a barbell of two extremes. Stocks tending to more reflect changes in nominal yields, gold tending to reflect changes in real yields, that equally weighted combine to a central 'bullet' type holding, somewhat similar to how 20 year Treasury and 1 year Treasury in equal measures barbell combines to being comparable to a central 10 year bond bullet. But where at times both stock and gold can move in the same direction such that cash helps dilute down the negative cases, and where more often after such high correlation (both stocks and gold down) more often a adjacent year will see one or the other tending to snap sharply upward (compensate for the bad year ... and more).

If you consider stock to be a form of very long (undated) conventional bond, and gold to be a undated inflation bond, then pairing that with long dated conventional bond and TIPS/inflation bond would seem to be reasonable. The Permanent Portfolio however opts to hold cash instead of TIPS. Since 2001 a PP with TIPS has compared to a third each in stock/gold/cash, however the conventional PP with short term treasury has outperformed both of those. Going back further however and a third each stock/gold/cash has been better overall, but with moderately higher volatility. Overall I like that stock/gold/cash choice as for me as a UK investor I can hold domestic Pound cash, US Dollar stocks, and gold is a form of global currency ... so nice currency diversification. Whilst being asset diversified across stocks, commodity (gold) and 'bonds' (cash). Each to their own.

Regards.

Clive (a.k.a Clean Bee :)).