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Hi M, Re: AIM performance compared to Buy

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OldAIMGuy Member Level  Sunday, 01/20/13 01:22:00 PM
Re: Maraplex post# 1410
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Hi M, Re: AIM performance compared to Buy and Hold........

One needs to understand other aspects of investing besides total return. If Buy/Hold is 100% invested, for instance, then Buy/Hold is 100% at risk for whatever the market does. If AIM, on the other hand performs equal to Buy/Hold but does so with an average of just 75% invested over the same period of time, then it has had superior risk adjusted return even if the total return is the same.

There's also "Upside/Downside Capture" as a measure. If one is using AIM and consistently captures 90% of the upside moves of the investment while only capturing 75% of the downside moves, then again each cycle will put the AIM closer to Buy/Hold and with enough cycles, surpass buy/hold in total return and performance.

AIM is a very long term business plan for investing. It takes many price cycles to do its work effectively.

I hope this helps in your thought process. I came up with a method of gaining perspective on AIM vs Buy/Hold or Market Timing. It's is called ROCAR. (Return On Capital At Risk). It's acually return on average capital at risk for the length of the investment period. If one takes the total return percentage and divides it by the average amount that has been at risk, then one gets a risk adjusted return.

Let's say that Investment A returns 12% for Mr. Buynhold. Mr. AIM invests in the same Investment A but uses AIM as the guide over time to manage the risk of the investment. Mr. Buynhold is 100% invested for the total time frame, so his ROCAR is 12% divided by 1.00 which is still 12%. Mr AIM managed a 9% return on his AIM managed investment in the same security. However, he was, on average over the same time frame, only 70% investes. His ROCAR would be 9% divided by 0.7 or 12.85%. In other words, the same investment worked harder than Mr. Buynhold's over the course of time.

While you can't deposit ROCAR at the bank, it helps us to understand the risk adjusted return on the investment. Cash when not being utilized, is essentially giving us a risk free rate of return. So, if an investment in SPY turned a 93% total return for Mr. Buynhold, and Mr AIM turned in an 85% total return it appears that AIM failed the test. However, if it turns out that AIM only was 70% at risk on average and turned in a total return that was just 8 percentage points less that being 100% at risk, then which is superior?

The goal then is to achieve the best total return AND the best risk adjusted return. THis is true whether we're market timing, sector switching, AIMing or Lump Sum Buy/Hold. The market timer who turns in 12% but is invested 100% for only 80% of the time has a higher ROCAR than does Mr. Buynhold for the same return. Same with AIM. The system that provides consistently higher ROCAR for the same total return is the system that is truly winning.

Best regards,

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