A.I.M. Users Bulletin Board

[labestul]

A General Question

I am curious. What do members of this board think about and/or do about the AIM variation that I will describe below. I'll first describe it and then offer a few of my own comments. Please let me know your thoughts?

Description:

Whenever we start a new AIM account we decide how much of our total investment will go into the stock or mutual fund and how much will go into cash. Lichello's various editions set various splits from 50/50 to 80/20 in the latest edition. Tom Veale's Idiot Wave (Thank you Tom) in effect provides a weekly split which could be in some way the optimal starting split at that time point. OK ... FINE ... BUT!

Suppose I started an AIM account with some stock (ACME WIDGETS say) one year ago with a 50/50 split following the original Lichello settings. Its now one year later and my total portfolio value is now $20,000 instead of the original $10,000 that I invested. But let's say that the current stock value is $15,000 and cash is $5,000.

Now let's say that you have $20,000 with which you want to start an AIM account also with ACME WIDGETS. You follow Lichello's standard settings just as I did and so you use a 50/50 split.

The situation is now that each of us has an AIM account worth $20,000 at the same time but my split is 75/25 and your split is 50/50. In answer to the questions ... which one of us is right? at first glance it seems to me that the answer must be at least one of us is wrong.

Assuming that you and Lichello are correct then perhaps I should make some adjustment outside of the normal AIM transactions and rebalance my stock to cash ratio.

Finally my question ...

Should one periodically rebalance one's AIM account and if so ... what technique should be used and how frequently should the rebalancing be performed?

My Comments:

If rebalancing is appropriate then the frequency of rebalancing should depend upon one's normal AIM update frequency. For example if I normally update monthly and if therefore I rebalance yearly then you should probably rebalance more frequently if your update period is weekly.

One important aspect of the ACME WIDGETS example above is that even though the total portfolio values are the same, the portfolio control values will be different. Therefore in my opinion any rebalancing should probably also result in an adjustment to portfolio control.

One final note:

In his AIM book "I Guarantee You Will Buy Low Sell High and Make Money", Jeffrey Weber advocates monthly updating with a yearly rebalancing. If this topic is of interest to you then you may find Jeffrey's book interesting.

Barry