AIM UK

[ls7550]

A principle reason why I use 12 overlapping year long stop-loss positions instead of yearly positions can be seen if you run yearly backtests against the Dow (1929 to 2009) as shown below - the result is too many 'dry' years.

By starting a new stop-loss position, once each month, each with a stop-loss set at 5% and a time-stop set to 12 months and using 1/12th of the 'cash' reserves available at the time is that you don't encounter as many 'dry' years when using monthly positions. You're better time diversified and more likely to have bought into at least one month at or near that years lows.

In concept if dividends = cash = 5% then each such position will at worse end the year with the same amount as at the start of the year as dividends and/or cash interest replenishes the 5% stop loss.

If you assume cash/dividends at a constant 5% rate then the Dow's total annualised rises to 9.7% versus 8.9% for the stop-loss style. Yet over any one runs 12 month start to end date the worse decline is near break-even. So its a form of cash like risk (low downs) with reasonable investment reward that aids in minimising cash-drag.

More recently I've been evaluating extending the defensive part by blending in a Permanent Portfolio element. So far that looks to be a reasonable low-down, better than cash reward type alternative/addition. Presently therefore I intend to build up a PP position over time to around 50/50 levels of average 'cash' reserves (half of cash reserves in PP and half in the stop-loss style).

 
 Stop Loss style yearly results 
 0.950	1929 
 0.950	1930 
 0.950	1931 
 0.950	1932 
 0.950	1933 
 0.950	1934 
 0.950	1935 
 1.238	1936 
 0.950	1937 
 0.950	1938 
 0.950	1939 
 0.950	1940 
 0.950	1941 
 0.950	1942 
 1.133	1943 
 1.121	1944 
 1.265	1945 
 0.950	1946 
 0.950	1947 
 0.950	1948 
 0.950	1949 
 1.176	1950 
 1.144	1951 
 0.950	1952 
 0.950	1953 
 1.440	1954 
 1.208	1955 
 0.950	1956 
 0.950	1957 
 1.340	1958 
 1.164	1959 
 0.950	1960 
 1.187	1961 
 0.950	1962 
 1.170	1963 
 1.146	1964 
 1.109	1965 
 0.950	1966 
 1.152	1967 
 0.950	1968 
 0.950	1969 
 0.950	1970 
 0.950	1971 
 1.149	1972 
 0.950	1973 
 0.950	1974 
 1.377	1975 
 1.179	1976 
 0.950	1977 
 0.950	1978 
 1.042	1979 
 0.950	1980 
 0.950	1981 
 0.950	1982 
 1.203	1983 
 0.950	1984 
 1.277	1985 
 1.227	1986 
 0.950	1987 
 0.950	1988 
 1.270	1989 
 0.950	1990 
 0.950	1991 
 1.042	1992 
 1.137	1993 
 0.950	1994 
 1.335	1995 
 1.260	1996 
 1.226	1997 
 0.950	1998 
 1.248	1999 
 0.950	2000 
 0.950	2001 
 0.950	2002 
 0.950	2003 
 0.950	2004 
 0.950	2005 
 1.162	2006 
 1.064	2007 
 0.950	2008 
 0.950	2009 
 	 
 19.886	Stop-Loss Gain Factor 
 32.440	Index Gain 
 	 
 1.038	SL p.a 
 1.044	Idx p.a.