A.I.M. Users Bulletin Board

[ls7550]

Hi Tom

As per my "selling out potential strong longer term gainers too early" posting (Msg 28241) I've opted to migrate Ladder from using linear step spacings to proportional step spacings - e.g. start at a top level price and reduce each steps price level by perhaps a 0.98 factor (2%) downwards until reaching the Ladder bottom price level.

Re: correlations and your Overall, maybe the peak of a market cycle will require, as you said, only a 10% to 20% max. cash reserve

The benefit of the new Ladder is that the top can initially be set at 10X the current 52 week mid price level and the bottom set to 0.25X that mid price - which gives a good range within which we are unlikely to exhaust neither cash nor stock (the previous linear based Ladder typically exhausted cash at around the 2X start dates Mid price top level).

Typically this will have you at around 60% stock exposure, 40% cash exposure at or around the 52 week mid price level.

By scaling the total fund value by around 1.5 times before applying to such Ladder(s) then typically you'll average close to 100% overall indicated stock exposure. The cash reserves will however effectively be virtual as all actual funds would have been expended on stock.

With Ladder you pick your own price and time points to trade at, I typically look to trade after a 5% same direction (buy after a buy, sell after a sell) and 10% reverse direction (buy after a sell, sell after a buy).

To free up cash from one account (Ladder) for another therefore requires one account to be selling as another is buying (and in around the same capital amounts). When so then funds are effectively migrated from one holding to the other.

A benefit however is that we don't have to predict inverse correlations - as one stock/fund rises it only takes any one of the other stocks/funds to be declining for trades to occur.

At this extreme you don't need any cash reserves, will be around 100% average equity exposed (and hence likely pace buy-and-hold), yet additionally capture AIM like volatility capture benefits.

A key issue with this style however is where all holdings simultaneously all decline as cash reserves are virtual and positions cannot be added to. One option to address this is to migrate funds into double-longs to keep the overall exposure aligned with that indicated. This may however result in 50% of funds (virtual cash reserve) being exhausted into double-funds (150% overall exposure) at the lows.

The simultaneous rise of all holdings isn't an issue as real stock is migrated into real cash.

A more aggressive style, with greater risks, but greater rewards. The key is not to own a collection of holdings that all decline significantly at or around the same time and to avoid total failures. Whilst ETF's minimises the total failure issue, picking a diverse range of holdings that likely have low or inverse correlations is the more trickier issue to resolve.

I think that your more recent retirement holdings are much more in keeping with such low correlations than were your previous sector based holdings.

Best regards. Clive.