A.I.M. Users Bulletin Board

[ls7550]

Lumping in/out

Elsewhere on another board, yet another periodically highlighted how ...

example periods of time when the SP500 required more than a decade to “permanently” exceed a previous high water mark

20 yrs. May 1901-Aug 1921
20 yrs. Aug 1929–May 1949
15 yrs. Nov 1968-Mar 1983
13 yrs. Mar 2000- Jan 2013

With the usual reply of something like

Exactly. Almost nobody lump sums in on the peak or trough

BUT! They do. Buy and Hold is no different to the costless lumping in (and out) every day. B/H'ers would have endured those bad case periods as measured from the start to end dates. AIM however and its dynamics of adding-low/reducing-high helps smooth down such cases. Not sure about the 1901 case, but certainly with the 1929 and 2000 cases they followed large/fast gains, across which AIM would have tended to reduce exposure, build up reserves for during the bad times when the cash was re-deployed back into stocks. The 1968 case is more a situation of where that ran into very high 1970's/1980's inflation, unpredictable in advance, but where gold served/hedged the portfolio well.

Consider a case where 67/33 stock/gold sees the 67 stock value halve, 33 gold value double to end up at 33/67 stock/gold weightings. Rebalancing resets the portfolio back to 67/33 but where twice as many stock shares are held than before. A Martingale betting sequence, after a losing play double up the stake (number of shares), that in a casino bears the risk of running out of money, but where with stocks (and gold) the share prices can halve (gold double) ... a infinite number of times.

Some suggest that if you have a lump sum to invest it all immediately as on average that yields the higher reward. But that omits consideration of individual cases (investors) will see extremes around that average, and for the worst individual case will be worse than had they averaged in. Much of investing is simply a matter of averaging, as the average is good-enough, avoiding the extreme worst case outcome should be a priority. Diversifying is a form of averaging, as is AIM.

Clive (whose trying to distract his mind from the discomfort from that he's been in a dentist chair this afternoon for two hours having a main molar crown prepared).