Hi Ken.
Yes $12,000 would be invested at $1000 per month.
A moving (trailing) stop loss would likely prevent some up-runs being benefited from to the full extent (but in others perhaps gain more than would otherwise have been achieved).
Consider that initially the chances of a 5% rise or 5% fall is 50:50. Once a play has moved up 5%, then there's 10% allowance before the stop would trigger, so from that point the odds that another additional 5% gain might be achieved from that point are 5 : 10
At 10% above the next 5% gain odds are 5 : 15 ... and so on.
In practice you'll find that this approach achieves more plays running to year end completion than would occur if a trailing 5% stop loss was used. Over the year, one or more of the plays are likely to be started at or near the years low value whilst other plays are likely to be closed out at or near the years high level. On average, its like having one or more plays running from the year low to the year high.
It's an average of averages type strategy that over the longer term we can expect to come out at or around the average expected level. As such at times we will be deviating from that average level, but by limiting our downside levels, generally we should not drift down too much.
If the odds are a 38% chance that any one position will not be stopped, then conversely that's 38% of plays will be stopped, leaving 24% that stay within the +/- 5% range, then we can assume that 38 + 24 = 62% of cases wont (on average) need to call upon the recovery part (5%) (for the 24% set, generally 12% will be above and 12% below the +/-0 line and in combination probably balance out). So we can leverage the position accordingly and expect that (on average) we will have sufficient cash generated from cash and dividends to cover those positions that were stopped out.
The 5% cash or dividend level is all very subjective. Over the longer term that is the typical average level (at least it is for the UK). Some periods, such as at present, the actuals may be below that, whilst at others they may be above.
For US investors, perhaps a UK cash deposit account could be used. I believe we have greater protection over here for cash deposits (typically 95% of the funds being guaranteed to be paid back even if the Bank goes bust (up to around a maximum of about $40,000 in any one account (people depositing more than that tend to spread them across several banks to maintain that protection across the total cash amount being deposited)). Of course that would induce some currency (exchange rate) risk (or benefit depending upon your view of the pound/dollar exchange rate). Alternatively a currency derivative could be used to cover that currency risk. We have a number of good quality shares (large well established companies) trading over here with present dividend levels in excess of 5%, and our bank rates (cash) are currently 4%. The UK is in many respects just another state of the US and our market tends to mirror the Dow/S&P over time (generally growing less than the Dow as we pay more dividends over here (tax benefits), but on an income re-invested basis, returns come out pretty comparable). In effect therefore, whilst US stocks may not be paying 5% dividend levels, they retain more (again because of tax incentives to do so).
Try not be too regimental with the actual figures. Use them instead as a money management type indicator as to how much you should have on risk at any one time. No need to be exact as we're dealing with averages, so over time you might expect to slighly underperform the average and at others outperform the average. Over the longer term however you could expect the end results to be more or less at or around that average level.
If your OK with Excel/spreadsheets, why not try some backtesting for yourself and the potentials will become clearer.
Sorry, this reply drew out longer than I anticipated. Hope it helps.
Regards.
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