Saturday, February 12, 2011 9:37:53 AM
RE: Initial Cash/Equity Ratio
That is my take on the point of view that all investors have no solid information for deciding what the optimum Cash/Equity Ratio should be when they start their investment.. .it is not only a problem for AIMers.
By the book 50-50 stock/cash as Lichello originally designed it. Forget his temptation/lead in later life to uplift the amount of stock exposure and just stick with the original design.
Managed in the way Lichello originally intended - against a portfolio and relatively infrequent reviews and cash burn will survive even the most extreme cases we've seen historically since the 1920's.
The first chart looks a bit odd in apparently having loads of cash, but its a distortion due to the log scaling (in linear scaling the amounts are so small they're not visible). The second chart provides a better indication of the amount of stock and cash weightings over time.
With 50-50 stock/cash initial AIM settings, against a portfolio (index or ETF) of individual stock holdings, reviewing relatively infrequently, reasonable gains can be achieved with less risk. For example from the peak prior to the 1930's Wall Street Crash to when the fund recovered back to those former high value levels was less than 5 years.
The main flaw in the original design was the need for a Vealie ( http://www.aim-users.com/diction.htm#q7 ) to prevent excessive cash reserves being built up at the cost of too little stock exposure. Even with Vealie's being pulled large amounts of cash build up can still occur, for example the above chart overall averaged 62% average cash (38% average stock exposure) as a result of cash becoming heavy in percentage terms due to periodic large declines in stock values having the effect of proportionately raising the cash reserves.
If you are aware that over the longer term your AIM will have a tendency towards 40/60 type stock/cash proportions then it makes sense to target 'spicier' holdings so that you are following more of a Larry Swedroe Fat Tails type allocation (30% small cap, 70% cash) than you would be in averaging 30% total stock market 70% cash if you opted to AIM a total stock market index/ETF.
With around 0.3 average trades per year (one trade every 3 years on average) in the above example, the overhead of trading costs/stock churn is pretty minimal. For the actual stock holding you could just AIM Small Cap Value alone in one single AIM account. As example ETF's for such purpose - Tom holds both DLS (international) and DES (US) small cap value as part of his IRA AIM's. Either or a combination of both could be used alone. Both of those however have higher expense ratio's than using perhaps Vanguards VISVX (ER of 0.28% such that with 40% average exposure to that = 0.11% per year expense ratio relative to the AIM's total fund value).
One AIM against one ETF, reviewed once yearly and being fed instructions of exactly how much to buy or sell, and perhaps averaging 60% in cash is quite boring, but has provided 100% all-stock like rewards over the longer term with lower risk. Emotionally however its difficult to run with that as we live in a world full of temptations to tweak and improvement seek (which reminds me I haven't defrag'd my hard disk for a few weeks now :)
That is my take on the point of view that all investors have no solid information for deciding what the optimum Cash/Equity Ratio should be when they start their investment.. .it is not only a problem for AIMers.
By the book 50-50 stock/cash as Lichello originally designed it. Forget his temptation/lead in later life to uplift the amount of stock exposure and just stick with the original design.
Managed in the way Lichello originally intended - against a portfolio and relatively infrequent reviews and cash burn will survive even the most extreme cases we've seen historically since the 1920's.
The first chart looks a bit odd in apparently having loads of cash, but its a distortion due to the log scaling (in linear scaling the amounts are so small they're not visible). The second chart provides a better indication of the amount of stock and cash weightings over time.
With 50-50 stock/cash initial AIM settings, against a portfolio (index or ETF) of individual stock holdings, reviewing relatively infrequently, reasonable gains can be achieved with less risk. For example from the peak prior to the 1930's Wall Street Crash to when the fund recovered back to those former high value levels was less than 5 years.
The main flaw in the original design was the need for a Vealie ( http://www.aim-users.com/diction.htm#q7 ) to prevent excessive cash reserves being built up at the cost of too little stock exposure. Even with Vealie's being pulled large amounts of cash build up can still occur, for example the above chart overall averaged 62% average cash (38% average stock exposure) as a result of cash becoming heavy in percentage terms due to periodic large declines in stock values having the effect of proportionately raising the cash reserves.
If you are aware that over the longer term your AIM will have a tendency towards 40/60 type stock/cash proportions then it makes sense to target 'spicier' holdings so that you are following more of a Larry Swedroe Fat Tails type allocation (30% small cap, 70% cash) than you would be in averaging 30% total stock market 70% cash if you opted to AIM a total stock market index/ETF.
With around 0.3 average trades per year (one trade every 3 years on average) in the above example, the overhead of trading costs/stock churn is pretty minimal. For the actual stock holding you could just AIM Small Cap Value alone in one single AIM account. As example ETF's for such purpose - Tom holds both DLS (international) and DES (US) small cap value as part of his IRA AIM's. Either or a combination of both could be used alone. Both of those however have higher expense ratio's than using perhaps Vanguards VISVX (ER of 0.28% such that with 40% average exposure to that = 0.11% per year expense ratio relative to the AIM's total fund value).
One AIM against one ETF, reviewed once yearly and being fed instructions of exactly how much to buy or sell, and perhaps averaging 60% in cash is quite boring, but has provided 100% all-stock like rewards over the longer term with lower risk. Emotionally however its difficult to run with that as we live in a world full of temptations to tweak and improvement seek (which reminds me I haven't defrag'd my hard disk for a few weeks now :)
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