Monday, January 11, 2010 6:39:56 PM
I was talking with TooFuzzy about this the other day and thought that others may be interested -
Rather than holding AIM cash in CD's and maybe suffering from some cash-drag, if instead that cash is invested in something like Permanent Portfolio (PP) or/and Mebane Faber's Quantitative Asset model then that can help minimise cash-drag.
PP has a rather neat characteristic when combined with AIM. PP starts with 25% equal allocations and rebalances back to 25% equal amounts any time one of the component parts (stocks, gold, bonds, cash) exceeds 35% of the whole or declines below 15% of the whole. If therefore you add/withdraw funds directly from the PP 'CASH' component part to finance AIM buys (or manage the cash proceeds from sales), then that addition/reduction may result in the 15% or 35% rebalance trigger points being breached, and if so you rebalance the set back to 25% equal amounts. Which makes it pretty dynamically adjustable to account for new/removed funds over time.
In my particular AIM style I use a log stochastic method that I call Ladder. The following example covers dividend yields spanning from nearly 12% down to around 1.5%, which encompasses all of historical UK FT100 extremes (and a bit more in the case of the 1.5% yield). Ladder is the topmost level, i.e. is applied to the total fund amount and advises of appropriate amounts of 'cash' to carry at any one time. Additional buys and sells occur as the price varies over time (I sort of trade in an AIM like manner and trade each step in the same direction as the previous trade, but require a 3 step reversal to trade in the opposite direction).
If the 'cash' part of Ladder isn't invested in a CD, but instead is invested in a PP then the concept is that both the stock and 'cash' parts of ladder (i.e. PP paces stock gains in general) generate stock like returns - but the combination/trading also has additional benefit arising out of rebalance gains, such that the overall total paces stock gains plus a bit (rebalance gains).
The exact same principle could equally be applied to conventional AIM - i.e. let PP manage the AIM accounts (or combined AIM'd accounts) cash reserve(s). PP has a history of low draw-downs but modest/acceptable rewards and as such is a form of stock like reward with cash-like draw-down risk (near cash like risk for near stock like reward).
As an example the current FT100 is around 5500 and the above Ladder indicates that around 63% ($63,000 out of the $100,000 total) is appropriate at that price. So $37,000 is invested in Ladder stock. The $63,000 'cash' is then allocated to PP and (at least initially) split four ways between stocks, bonds, gold and cash ($15,750 invested in each). If the FT100 price later declines to say 5000 then the Ladder indicates 58% cash is appropriate ($58,000) and as previously $63,000 cash had been indicated implies that we need to buy $5,000 worth of stock. To fund that purchase $5000 is taken from PP's cash component (reducing that down from $15,750 to $10,750). If at that time the PP hadn't changed in overall total value then the total value of the PP set would be $63,000 previous and $58,000 current of which $10,750 was in the PP cash component (18.5%) and around $15,750 in each of stocks, gold and bonds (27.1% of whole PP each). In this particular case therefore no PP rebalance trigger would have arisen (each of stocks, gold, bonds and cash being within the 15% and 35% rebalance band levels). Had however the amount of cash removed to fund the Ladder additional stock purchase been larger then the percentage amount of cash relative to the whole PP might have been below the 15% rebalance threshold, in which case the PP would have been rebalanced to equal 25% proportions.
Rather than holding AIM cash in CD's and maybe suffering from some cash-drag, if instead that cash is invested in something like Permanent Portfolio (PP) or/and Mebane Faber's Quantitative Asset model then that can help minimise cash-drag.
PP has a rather neat characteristic when combined with AIM. PP starts with 25% equal allocations and rebalances back to 25% equal amounts any time one of the component parts (stocks, gold, bonds, cash) exceeds 35% of the whole or declines below 15% of the whole. If therefore you add/withdraw funds directly from the PP 'CASH' component part to finance AIM buys (or manage the cash proceeds from sales), then that addition/reduction may result in the 15% or 35% rebalance trigger points being breached, and if so you rebalance the set back to 25% equal amounts. Which makes it pretty dynamically adjustable to account for new/removed funds over time.
In my particular AIM style I use a log stochastic method that I call Ladder. The following example covers dividend yields spanning from nearly 12% down to around 1.5%, which encompasses all of historical UK FT100 extremes (and a bit more in the case of the 1.5% yield). Ladder is the topmost level, i.e. is applied to the total fund amount and advises of appropriate amounts of 'cash' to carry at any one time. Additional buys and sells occur as the price varies over time (I sort of trade in an AIM like manner and trade each step in the same direction as the previous trade, but require a 3 step reversal to trade in the opposite direction).
If the 'cash' part of Ladder isn't invested in a CD, but instead is invested in a PP then the concept is that both the stock and 'cash' parts of ladder (i.e. PP paces stock gains in general) generate stock like returns - but the combination/trading also has additional benefit arising out of rebalance gains, such that the overall total paces stock gains plus a bit (rebalance gains).
The exact same principle could equally be applied to conventional AIM - i.e. let PP manage the AIM accounts (or combined AIM'd accounts) cash reserve(s). PP has a history of low draw-downs but modest/acceptable rewards and as such is a form of stock like reward with cash-like draw-down risk (near cash like risk for near stock like reward).
As an example the current FT100 is around 5500 and the above Ladder indicates that around 63% ($63,000 out of the $100,000 total) is appropriate at that price. So $37,000 is invested in Ladder stock. The $63,000 'cash' is then allocated to PP and (at least initially) split four ways between stocks, bonds, gold and cash ($15,750 invested in each). If the FT100 price later declines to say 5000 then the Ladder indicates 58% cash is appropriate ($58,000) and as previously $63,000 cash had been indicated implies that we need to buy $5,000 worth of stock. To fund that purchase $5000 is taken from PP's cash component (reducing that down from $15,750 to $10,750). If at that time the PP hadn't changed in overall total value then the total value of the PP set would be $63,000 previous and $58,000 current of which $10,750 was in the PP cash component (18.5%) and around $15,750 in each of stocks, gold and bonds (27.1% of whole PP each). In this particular case therefore no PP rebalance trigger would have arisen (each of stocks, gold, bonds and cash being within the 15% and 35% rebalance band levels). Had however the amount of cash removed to fund the Ladder additional stock purchase been larger then the percentage amount of cash relative to the whole PP might have been below the 15% rebalance threshold, in which case the PP would have been rebalanced to equal 25% proportions.
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