I will explain the gist of it. The crucial calculation is the true average cost which is based on LIFO. Since this is the case, a simple spreadsheet won't do. I had to program it because it required, when selling, looking back at purchases and picking off the number of shares at the different prices last to first. Then average cost will be based on the remaining shares and their combined actual cost.
On with the gist: I don't like AIM for 2 reasons: 1) Because it isn't truly based on average cost. Portfolio Control and SAFE are devices to 'guesstimate' the average cost. And, 2) because Portfolio Control can never go up when the true average cost can indeed go up. I also don't like Synchrovest for 2 reasons: 1) it doesn't use true average cost, but rather an average buying price and 2) it always buys into a stock no matter what the price. (When I say "I don't like" I don't mean it to sound as if there is something intrinsically wrong with either method nor am I trying to sound superior, it is just simply a personal preference. I believe AIM and Synchrovest have merit - that is, they work!)
I treat Cash and Stock Value equally. When Value is above cost I then multiply the Stock Value by a *factor* (I'll explain in a moment) and sell that amount. Conversely, when Value is below cost I then multiply Cash by a factor and buy that amount.
The factor is simply the ratio between value and cost - very similar to Synchrovest. However, I'm sure you will appreciate that there is a problem with ratios. For example, take two prices: 4 and 9. If one looks at the ratio in this way "4/9" then the answer is less than 50%. But, if one looks at the ratio in this way "9/4" then the answer is greater than 200%. So, you see there is a disparity in a simple ratio. Value can never fall greater than 100% below cost but value can be any percentage above cost. So, there is a mathematical way of muting this disparity or of evening the percentages out. You probably learned this formula in High School algebra. Anyway, it is this that I use for the factor.
So, every month there is a difference between value and cost and from month to month there will be a difference in the size of the ratios. So, on months where value and cost are close, not much money will be exchanged and on months where value and cost have diverged significantly, there will be a significant exchange of money. (This just seems to be in accord with commonsense.) And, since I'm in an IRA and in a program with virtually no commission (FolioFN) then I'm not concerned about tax consequences or commissions on small sales/purchases.
There's no tweaking involved. I believe the search for parameters is a never-ending fool's game. One will never find the optimum parameters for they will change. Even if you statistically find out what worked in recent history, the moment you try it you will be working with less than optimal parameters for they will have already changed. You can get a migraine trying to find the parameters. And, the search will *never* end.
So, I set up the account 50% cash and 50% stock. I guess you could tweak that, but why would anyone do that - unless they knew the future? And, if that were the case then they wouldn't be using AIM I can tell you that. <lol> I guess you could tweak what percentage of cash or stock the factor is multiplied by.
Balancing the portfolio within the Stock side of the program is very similar - if not the same - as Jibes has described.
The reason I use sector ETFs is that I don't know the future. I don't want to constantly try to figure out which stock is going up or which one of my holdings is in danger of going bankrupt. I also don't want to get into the game of following what's hot and what's not. So, I tried to get a diverse group of sectors that hopefully, by the time I retire, will have gone through at least one cycle of being hot and not. Hopefully, many sectors will go through several iterations. But, I don't know. I don't want to spend a whole lot of time on my retirement holdings - I'd rather spend that time trying to earn more to put into it.
So, there you have it in general terms. With a little investigation on your part you can fill in the gaps. (It's not rocket science, you know! <g>)
Matt
On with the gist: I don't like AIM for 2 reasons: 1) Because it isn't truly based on average cost. Portfolio Control and SAFE are devices to 'guesstimate' the average cost. And, 2) because Portfolio Control can never go up when the true average cost can indeed go up. I also don't like Synchrovest for 2 reasons: 1) it doesn't use true average cost, but rather an average buying price and 2) it always buys into a stock no matter what the price. (When I say "I don't like" I don't mean it to sound as if there is something intrinsically wrong with either method nor am I trying to sound superior, it is just simply a personal preference. I believe AIM and Synchrovest have merit - that is, they work!)
I treat Cash and Stock Value equally. When Value is above cost I then multiply the Stock Value by a *factor* (I'll explain in a moment) and sell that amount. Conversely, when Value is below cost I then multiply Cash by a factor and buy that amount.
The factor is simply the ratio between value and cost - very similar to Synchrovest. However, I'm sure you will appreciate that there is a problem with ratios. For example, take two prices: 4 and 9. If one looks at the ratio in this way "4/9" then the answer is less than 50%. But, if one looks at the ratio in this way "9/4" then the answer is greater than 200%. So, you see there is a disparity in a simple ratio. Value can never fall greater than 100% below cost but value can be any percentage above cost. So, there is a mathematical way of muting this disparity or of evening the percentages out. You probably learned this formula in High School algebra. Anyway, it is this that I use for the factor.
So, every month there is a difference between value and cost and from month to month there will be a difference in the size of the ratios. So, on months where value and cost are close, not much money will be exchanged and on months where value and cost have diverged significantly, there will be a significant exchange of money. (This just seems to be in accord with commonsense.) And, since I'm in an IRA and in a program with virtually no commission (FolioFN) then I'm not concerned about tax consequences or commissions on small sales/purchases.
There's no tweaking involved. I believe the search for parameters is a never-ending fool's game. One will never find the optimum parameters for they will change. Even if you statistically find out what worked in recent history, the moment you try it you will be working with less than optimal parameters for they will have already changed. You can get a migraine trying to find the parameters. And, the search will *never* end.
So, I set up the account 50% cash and 50% stock. I guess you could tweak that, but why would anyone do that - unless they knew the future? And, if that were the case then they wouldn't be using AIM I can tell you that. <lol> I guess you could tweak what percentage of cash or stock the factor is multiplied by.
Balancing the portfolio within the Stock side of the program is very similar - if not the same - as Jibes has described.
The reason I use sector ETFs is that I don't know the future. I don't want to constantly try to figure out which stock is going up or which one of my holdings is in danger of going bankrupt. I also don't want to get into the game of following what's hot and what's not. So, I tried to get a diverse group of sectors that hopefully, by the time I retire, will have gone through at least one cycle of being hot and not. Hopefully, many sectors will go through several iterations. But, I don't know. I don't want to spend a whole lot of time on my retirement holdings - I'd rather spend that time trying to earn more to put into it.
So, there you have it in general terms. With a little investigation on your part you can fill in the gaps. (It's not rocket science, you know! <g>)
Matt
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
