Hi Dan.
As others have indicated with Vealies you increase Portfolio Control by half the amount of stock value AIM indicates to sell, and don't sell any shares.
Are you familiar with SWR, safe withdrawal rate? Commonly suggested as being 4%. i.e. at the start you draw 4% of the portfolio value as income for the first year, and then uplift that $$$ amount by inflation as the amount drawn in subsequent years. Which provides a regular inflation adjusted income (assumes all dividends and interest are reinvested, but obviously as part of actual management some/all of dividends and interest might form some/all of the SWR value being drawn, maybe with a surplus that gets reinvested into stocks, or where dividends/interest isn't enough and some shares are also sold to fulfil the $$$ amount being drawn).
That 4% figure reflects historic worst case measures and commonly is based to a 30 year time period. i.e. in the worst historic case after 30 years of a 4% SWR there was nothing left. But more usually (non worst cases) there was substantial residual portfolio value still remaining at the end of 30 years.
Buffett Paradox: Warren Buffet suggests all stocks for retirees who own their own home and have pensions covering base living expenses, but also suggests to cost average into stocks (save over years), or for lump sums to average-in rather than lump in, to avoid otherwise lumping in at the worst possible time. However buy and hold is no different to the daily cost-less lumping in each and every day.
Many Bogleheads suggest immediately lumping in, as that historically averaged better outcomes than cost-averaging in, but that overlooks the opportunity costs available when averaging in. Sometimes averaging in works out best, other times lumping works out best. Mathematically lumping in has the higher figure overall, but that excludes the option of averaging-in shifting to being all-in after declines. Imagine shortly after lumping in stocks drop 30%, the average-in investor might have only invested 10% and still have 90% cash that might then be lumped in. If the worst case historic 30 year period sustained a 4% SWR then having lumped in 90% at a near 30% discount then the supported worst case SWR rises to around 5.5% (at least conceptually it does).
However in other cases lump in works out best, so one approach might be to 50/50 lump and averaging-in. Start with 33% stock, increase that over years to 66%, and you average 50% stock exposure over those years. Similar reward expectancy as another who maintains 50/50 stock/cash by rebalancing back to 50/50 each year, but where you have less stock exposure in earlier yeas when 'sequence of returns risk' is considered the highest, more stock exposure in later years, but where dips in stock prices in later years is more inclined to just be giving back some of other peoples money (gains) rather than eating into ones own capital base.
If a newly retired starts with 33% stock, averages in another 33% over a number of years to have averaged 50% stock overall then likely they'll do OK. If they reserve the right to go all-in, if/when stock prices dive then having loaded all in at below peak levels they'll also likely do very well. But when to go all-in? That's where AIM automates things for you. Follow all buy trades, ignore all sell trades and sooner or later AIM will have you all-in at reasonable discounted average cost of stock such that the subsequent portfolio rewards are inclined to be good (avoided the worst cases). How can you set AIM to not sell shares? By using Vealies.
Conventional AIM has you both buy and sell shares, add-low/reduce-high type strategy. However it can be significantly better to not sell shares after having bought them at a discount. Start with 33% stock, end at 100% stock guided by AIM and in some cases the overall rewards can be substantially more than a lump-summer.
In addition to Vealies, how do you handle adding more to stocks each year. Well outside of regular AIM you simply increase Portfolio Control by the amount of additional stock value purchased. So if you start with $33K stock value, want to increase that by $3.3K/year for ten years (or whatever inflation adjusted equivalent value), then buying $3.3K of additional stock outside of AIM indicated trades and you increase Portfolio Control by $3.3K.
Just be careful with your emotions if shortly after starting a AIM stock prices crash and you're skipping around celebrating at having gone all-in, as others will think you're crazy. Further continuation of declines may follow to dampen your mood, however mid to longer term you're in a great position. Pretty much destined to do considerably better than average.
If no such dives occur, then broadly having averaged 50/50 stock is still inclined to do OK.
Clive.
AI
