AIM UK

[ls7550]

In the article mentioned by AIMster this AM one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.

I find this true in my own account many time. If the market drops significantly and my management model keeps my losses smaller, then I don't have to 'outperform' to such a great degree on the next uptick. Maintaining the relative lead through the next swing of the pendulum builds the long term outperformance.

One thing I have noticed in the past is that in attempting to limit downside losses, such as through holding part cash part stock, the risks can be higher than you might initially anticipate.

If you burn cash and end up 100% in stock too quickly when the stock price continues further south, then you end up with comparable downside losses from that point to that of buy and hold, but may have only partially gained from any previous upswings that buy and hold enjoyed full exposure to when you were only partially invested in stocks and stock prices were rising.

LD-AIM for instance magnifies the downside risks by effectively raising the bottom price at which you become 100% invested in stocks. Classic AIM also has a deficiency here as typically the next buy price level after a previous buy trade is too close (typically the first buy after starting an AIM account is around 15% below the start price level, consecutive buys after that first buy however typically occur at around a 2% or 3% lower price than that of the previous buy trade price level).

This is a principle reason why I personally prefer a bottom up approach of identifying a bottom price level at which I'm relatively content to become 100% loaded in stock at and structuring my trades according to that value. Equally it's the reason why I use a modified D'Alembert style that only starts investing after an initial downward price step rather than investing straight from the start price level.

By delaying by one downward step the cost averaging is improved. For example a 6000 start price level and 5000 and 4000 lower levels using a straight off approach would invest 33.3% of funds at each of those levels, an average of 5000 overall. Delaying by one step down means the average lowers to 4500 (50% in at 5000 and a further 50% in at 4000).

When the stop-loss component manages the Ladders cash reserves, then having 0% invested in the Ladder at the offset doesn't mean we miss any gains if the stock price rises, just that those gains are trapped by the price appreciation (stop-loss) engine instead, possibly even to a greater extent.

Clive.