Much of longer term investment rewards can simply be attributed to the price initially paid for stock. Buy at a high price and long term rewards can be bad. Buy at a low price and the rewards can be outstanding.
Cost averaging in regular amounts is one common way to reduce the risk of overpaying for stock in the first place. The trouble here however is that stocks can remain overpriced for long periods of time and if that coincides with when you're averaging in on a regular basis your overall average cost of stock is still at an overpriced level.
AIM in contrast cost averages DOWN the average cost of stock by repeatedly adding low, reducing high.
A characteristic of AIM with classic settings is that, over the mid term, it tends towards the longer term average reward (fair price purchase to fair price sell type rewards), as though you'd bought the stock initially at a fair price level, no matter if you start at a relatively low, fair or high price level. Extending out to even longer time periods and over that longer term it pushes the average cost down to as though you'd bought at a relatively low price and as such achieve outstanding returns over the longer term.
A consequence of that mechanism is that stock exposure levels decline over time, no matter if you start at a high, fair or low price level. Vealies are intended to mitigate that stock exposure decline, but have the adverse effect of reducing ROCAR (holding onto stock that AIM is saying should be sold). A better approach IMO is to not use Vealies and instead uplift stock exposure amounts manually over time, perhaps at a time when AIM is saying buy more stock.
Rather than using percentage ROCAR values for examples, let's instead use a ROCAR FACTOR where that factor is the ROCAR divided by the average buy and hold gain, so if ROCAR is 11% and B&H achieves 8% then 11 / 8 = 1.375 ROCAR FACTOR (RF).
Made up general examples :
In each case I'll assume initial 50-50 stock and cash weightings
Start AIM at a relative high. Over longer term stock exposure might decline to 25%. RF = 1.24. With Vealies stock exposure = 45% RF=1.05
Start AIM at a relative low. Over longer term stock exposure might decline to 25%. RF=1.4. With Vealies stock exposure = 45%, RF=1.05
So bought high or low, over the longer term with Vealies you achieve 50-50 type average exposure amounts, but the Vealies hit the ROCAR. Without Vealies the ROCAR is good, but the amount of exposure to that ROCAR is relatively low. AIM with Vealies is in effect a double edged sword, it will average down the cost of stock if started at a relatively high price level to achieve gains similar to had stock been bought at a fair price, but equally it will reduce gains towards more average levels when started at a relatively low price level.
A more reliable method to maintain the ROCAR FACTOR is to uplift the amount of stock exposure periodically whenever cash reserves are becoming relatively large. Doing that at a time when AIM is saying sell - as Vealies in effect do - is not the best choice of timing. Doing so at a time when AIM is saying buy is a better choice.
To identify appropriate amounts to increase stock exposure by, a simple method is to use a constant weighting type approach. Say you have 100K and invest 50K into a single AIM, with that AIM split 50-50 stock and cash, then you have 25K stock, 75% cash overall, but with a 25K stock, 25K cash AIM. Every once in a while rebalance that outer layer, so if the 50K AIM (stock and cash) is down to 40K, perhaps with 30K stock, 10K cash, whilst the original 50K cash has perhaps risen to 60K then the total is still 100K overall and the 40K AIM needs to be uplifted to 50K total value. Add the 10K in the stock/cash proportions at that time - 3:1 ratio is this case - and your AIM is now 37.5K stock, 12.5K cash.
Tweaking Portfolio Control etc settings is like dropping a few extra nuts and bolts into your engine in the hope of improving performance. It's more likely to screw up the smooth running cogs and wheels than make things run any better. To bolster performance look instead to feed the engine with better quality fuel.
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