A.I.M. Users Bulletin Board

[ls7550]

Hi Bob

The backtesting I had done in 2000 showed that Buy&Hold beat AIM

Comparison of B&H vs AIM is a bit of a tricky game.

As the amount invested in AIM is dynamic as cash is injected/removed when AIM indicated buys/sells occur there are several ways in which the relative performance can be measured.

We can use internal rate of return (IRR) against the total investment (stock and cash), or measure the individual components IRR (or use ROCAR http://www.aim-users.com/diction.htm#q18 ) to gain a feel for how well just the stock component performed.

When we measure IRR individually against stock and cash then the overall combined IRR across both will generally be between the IRR of stock and IRR of cash, in proportions approximately equal to the average amount of stock and cash exposure across the investment period.

Raising IRR on the stock proportion is relatively simple, we just sell riskier assets as the portfolio value increases and buy riskier assets as the portfolio value declines - which is what AIM basically does.

So whilst the IRR on stock will likely be above B&H, the IRR on cash will depict whether the combined IRR's exceed that of B&H or not according to the actual individual IRR's for both stock and cash, and the average proportions of stocks and cash held across the investment period.

Over periods when cash beats stocks then the IRR of the whole AIM account will generally exceed B&H's. In the absence of that however we might alternatively utilise the cash in an alternative preferably non-correlated investment. The IRR of that investment doesn't even need to be as high as B&H's IRR as the AIM stock IRR will most likely be in excess of B&H's and as such reduce the load upon the 'cash' IRR.

In the general case where cash under-performs stocks, the optimum case for AIM to beat B&H would be to fully deploy all cash into AIM stock holdings, across a set of holdings where the correlations are low such that as one stock is being reduced another (or several) are being increased by around the same capital amounts. Under such conditions your actual total returns will be more aligned to the AIM stock only based IRR (which generally exceeds B&H's IRR).

Generally the measuring of whether AIM beat B&H is therefore time and asset allocation specific. You can tune that asset allocation to either provide a less volatile but likely lower overall benefit investment style, or seek out-performance of B&H which more often would involve near 100% overall average stock exposure (excepting the times across which cash outperformed stocks). An extension of this is to use a dynamic asset allocation style - such as aligning cash reserves with the vWave (or similar), in which case your total returns will be somewhere between the two. Where vWave however also uplifts IRR, then that biases the total return IRR more closely towards that of beating B&H's IRR.

RE : If AIMing the 1x Long ETF and using the Double Inverse for the Cash portion had those negative attributes, would doing the opposite reduce those effects?

On a mathematical basis generally the better approach would be to SELL the Short. As buying the short has a negative compounding benefit then the seller benefits. I don't know of a viable way to actually implement selling of the short though as generally the actual buying and running costs are relatively high which negate (and more) any potential benefits.

Regards. Clive.