A.I.M. Users Bulletin Board

[ls7550]

Hi Toofuzzy

What does "REAL" price mean ? Where would you procure that?

It's the S&P500 price index value adjusted for inflation.

If nominal share price rises 10% over a period when inflation was 10% then in real terms that value/price doesn't buy any more or less than before. If your AIM tracks the real price then it will trade differently to if your AIM tracks the nominal share price. Comparing that historically and it looks to me that AIM of real share price did a better job in real (after inflation) terms than AIM'ing the nominal share price. Compare for instance forward 10 year outcomes after each AIM indicated buy or sell trades and for nominal price based AIM there was little difference in real (after inflation) terms. Whereas AIM of real price yielded a distinct/significant difference. And at the end of the day its the real value that matters (we invest money today that might otherwise have been spent today in order to spend at a later date and gains/loss in 'real' (after adjusting for inflation) purchase power is what matters).

Basically you maintain the ongoing nominal index price figure and divide that by the ongoing CPI index figure .. and use that as your AIM real price figure (price that AIM actually uses as its input). A complication is that the actual inflation rate over the last month (assuming monthly AIM reviews) isn't really known until later, so there's a degree of guesswork involved (use forecast/estimated current inflation) - and later go back and correct that according to actual figures. Generally provided the guess was within the same ballpark that wont make much difference to actual AIM indicated trades. But that does also mean its difficult/impossible to pre-calculate next AIM buy/sell values.

If however all of AIM-of-real-price buy trades resulted in a subsequent 10 year real gain of 6% annualised and all AIM sell trades resulted in a subsequent 10 year 3% annualised then that 'timing' obviously looks good. If AIM-of-nominal-price has both buys and sells subsequent 10 years real gains at 4% then the timing looks indifferent. And that's along the lines of what historic outcomes I saw when backtesting the two.

Regards.

Clive

PS as a example recent US inflation is indicated to be running at 5%, which relative to a monthly rate is 1.05^(1/12)= 1.004074

https://tradingeconomics.com/united-states/inflation-cpi

So if the S&P price had increased 2% over the last month I multiply the previous nominal index value by 1.02 = P and multiply the previous CPI index figure by that 1.004074 = I, and then dividing P by I is the AIM input real price value.