A.I.M. Users Bulletin Board

[ls7550]

Hi Toofuzzy

I would be happy to be holding 50% or MORE cash now.

I see Buffett is at around 25% cash ($127Bn cash relative to $550Bn BRK market cap)

Some years back I did a analysis of cash, had a nice chart that showed the S&P500 progression line, where drawdowns (dips below prior highs) were in-filled in red. IIRC I came out with something like 20% dips occurred relatively frequently enough that the frequency of occurrence versus 25% rebound (20% drop requires a 25% rebound to get back to break-even) were enough to potentially even hold all-cash and just buy the tips, sell after the recovery.

Can't recall the exact figures but was north of 5% real (after inflation). Potentially not that dissimilar to buy-and-hold rewards, whilst for much of time being all in cash.

AIM does similar, but in a more averaged in and out manner. I guess if you were just playing that all-in/out after dips/recoveries overall similar outcomes/rewards might occur.

On that basis, if there's no difference to buy-and-hold and selectively deployed cash, then a reasonable choice would be to 50/50 those two strategies (50% cash, but periodically all-in). Or any other level of cash percentage might suffice - just that would be more biased towards one 'style' over the other. Or alternatively perhaps 67/33 constant weighting might similarly average much the same overall outcome/reward.

For many, the 67/33 is perhaps the more comfortable choice, as having 50% cash and periodically moving to all-in after declines can be a emotional strain (emotional fear blocks behaving correctly at the right time). AIM similarly goes some way to overcome that fear, due to it making more smaller trades progressively over time.

Some can be comfortable with being all in and holding through thick and thin. Others think they'd be OK with that but capitulate after 50% declines/whatever ... and lose out. Yet others think that they'd hold high levels of cash and buy the dips, but when the time comes wait for lower valuations and miss the sharp rebounds. Very many opt for 67/33 and yearly rebalance - as the most comfortable choice, but even then some opt to not rebalance after declines and miss out. Historically something like the average investor under-performs by 2% due to emotions/bad behaviour - are their own enemy. Primary therefore is finding the strategy that is more inclined to yield appropriate behaviour at the right times and AIM is pretty good at driving that. And where even cash exhaustion before the bottom isn't a great sin, as it all tends to average out mid to longer term anyway.

Regards.

Clive.