Hi Tom (and others), yes, I realize that I made it difficult for AIM, picking the SP500 over that period. I don't mind lower results with AIM. Of course, everybody likes the stocks were AIM licks B&H. These are a trivial case: return is higher, and because AIM has been buying when the market was down and selling when the market was up, risk/volatility was lower. AIM wins hands down.
But there is another claim made for AIM: even when you don't beat B&H with it, you get compensated for it by the lowered risk. But usually the claim is just that the risk is lower, which I think is just too fuzzy. The lower risk has to compensate for the lower returns. Otherwise, there might be better ways to lower your risk, with a higher return. That is were the Sharpe ratio is useful.
My conclusion for the SP500, which I consider a bad AIM target, is that AIM didn't make it. But for very low vealie settings, AIM came close. Considering the nature of the SP500, and the market over the period considered, I think that this is extremely encouraging. So let us have a look at the Nasdaq. I checked the Nasdaq100, from from Okt 85 through Mar 02. I set safe at 10% both ways, minimum transaction 5% of Equity value, monthly checkups, and initial split 66/33, unless the vealie level was lower. I kept the 5% Risk Free Return and the 3% return on cash. This gave, for the different vealie levels (100% = no vealies):
(Vealie%, Return, Risk, Sharpe Ratio:)
100% - 9.7% - 10.2% - 0.47
80% - 9.7% - 10.2% - 0.46
75% - 9.5% - 10.8% - 0.42
67% - 9.6% - 12.5% - 0.37
50% - 10.5% - 16.4% - 0.33
33% - 12.1% - 20.2% - 0.35
25% - 13.3% - 22.0% - 0.38
20% - 14.1% - 23.3% - 0.39
15% - 14.3% - 25.1% - 0.37
B&H - 16.7% - 30.6% - 0.38
This time, I have entered some vealie levels between 100 and 50, and one past 20, to get a better picture of what was happening there. There are two optimums for the SR: 100% (actually between 82% and 100% there is no difference), and around 20%. And the 100% optimum has a way better Sharpe than B&H. Now we are getting somewhere!
It also appears that the more risk we allow (low vealie levels) the higher the return is. But when we start at the highest level, the extra return does not compensate for the extra risk at all. This reaches a low around 50%, after which the extra returns start to gain on the extra risk. Past 20%, the extra action no longer compensates for the rising risk.
Of course, this is all highly anecdotal: we have looked at the SP500 and the N100 only. But I think the results are very interesting. Any opinions are welcome.
Regards,
Karel
