Thursday, February 21, 2013 3:44:50 PM
Hi RCA420
The AIM-like approach that I use utilises a price ladder. I select a top price at which I'm content to be all in cash (all-out) and a bottom price at which I'm OK with being all-in. I then calculate appropriate amounts of exposure (or rather cash reserves) to hold at various prices. For the Dow (recent price around 14000) for instance, I might calculate a ladder such as : (ignore the green and blue parts, just look at the yellow price and indicated cash reserve part)
For the 14000 Dow price that ladder indicates around $540,000 cash reserves out of $1M total allocation to be appropriate i.e. $460,000 stock initially being purchased.
If later the Dow had dropped to 13500 then the ladder indicates that $461,000 cash reserve to be appropriate, so as the cash reserve is $540,000 that means buying $79,000 more stock at that 13500 Dow price level.
Typically a more volatile stock will zigzag around larger amounts and enable greater volatility capture gains to be captured over time. So ideally you want a more volatile stock for potentially better volatility capture gains.
If the Dow price moves above the top price level, I capture price appreciation gains. If the price zigzags around and perhaps ends up having just moved sideways I capture volatility capture gains. If the price drops down below the bottom of the ladder range then I'm all in, and have to wait for the price to rebound back up again, but would have cost averaged in at a lower average cost of stock price than had I fully loaded into the stock at day 1.
Deep dives and stay down are the potential risk. To reduce/eliminate that risk I might calculate the average cost of stock were the price to progressively decline down to the bottom ladder rung and then buy a PUT option with a strike price similar to that average price, buying sufficient contracts to a similar number of shares to what I'd hold at that bottom rung level. A 12 month Option for such 'insurance' might cost 5% - which is an overhead cost, but that protects against such deep dives/stay down cases as I can exercise the option and in effect sell all of the stock for the price I paid for it - no matter how deep the share price might actually have declined.
That insurance overhead cost can be countered (and more) by both volatility capture gains and/or price appreciation gains (dividend and cash interest also help to offset that cost).
Steve (The Grabber) also uses a stop loss type approach I believe (not certain, seem to recall some discussions around that a while back).
Other methods of protection is to AIM stocks that don't tend to move in the same direction as each other. If one is selling as another is buying then great.
Whilst individual stocks can be more volatile than funds, individual stocks run a greater risk of falling to zero - much less so with funds as typically failures are replaced within the index/fund during their decay process.
Ideally for settings, you do better not rebalancing if the prior trend subsequently continues, or better having rebalanced if the prior trend subsequently reverses. I've increasingly moved to just trading whenever a longer dated moving average such as the 200 day moving average is crossed rather than at fixed 15% (10% SAFE, 5% Min Trade Size) time points. i.e perhaps you might just look at what AIM indicates to be traded (or not) at such moving average crossover time points rather than monitoring on a weekly basis. Rebalance (trade) timing is all very hit and miss. More critical is to actually rebalance. AIM automatically makes you rebalance (assuming you actually follow its advice), which is a big plus on others who may be too fearful to add when prices have declined (in fear of further declines), or not reduce after prices have risen in the belief that even greater gains might follow (greed).
Best. Clive.
The AIM-like approach that I use utilises a price ladder. I select a top price at which I'm content to be all in cash (all-out) and a bottom price at which I'm OK with being all-in. I then calculate appropriate amounts of exposure (or rather cash reserves) to hold at various prices. For the Dow (recent price around 14000) for instance, I might calculate a ladder such as : (ignore the green and blue parts, just look at the yellow price and indicated cash reserve part)
For the 14000 Dow price that ladder indicates around $540,000 cash reserves out of $1M total allocation to be appropriate i.e. $460,000 stock initially being purchased.
If later the Dow had dropped to 13500 then the ladder indicates that $461,000 cash reserve to be appropriate, so as the cash reserve is $540,000 that means buying $79,000 more stock at that 13500 Dow price level.
Typically a more volatile stock will zigzag around larger amounts and enable greater volatility capture gains to be captured over time. So ideally you want a more volatile stock for potentially better volatility capture gains.
If the Dow price moves above the top price level, I capture price appreciation gains. If the price zigzags around and perhaps ends up having just moved sideways I capture volatility capture gains. If the price drops down below the bottom of the ladder range then I'm all in, and have to wait for the price to rebound back up again, but would have cost averaged in at a lower average cost of stock price than had I fully loaded into the stock at day 1.
Deep dives and stay down are the potential risk. To reduce/eliminate that risk I might calculate the average cost of stock were the price to progressively decline down to the bottom ladder rung and then buy a PUT option with a strike price similar to that average price, buying sufficient contracts to a similar number of shares to what I'd hold at that bottom rung level. A 12 month Option for such 'insurance' might cost 5% - which is an overhead cost, but that protects against such deep dives/stay down cases as I can exercise the option and in effect sell all of the stock for the price I paid for it - no matter how deep the share price might actually have declined.
That insurance overhead cost can be countered (and more) by both volatility capture gains and/or price appreciation gains (dividend and cash interest also help to offset that cost).
Steve (The Grabber) also uses a stop loss type approach I believe (not certain, seem to recall some discussions around that a while back).
Other methods of protection is to AIM stocks that don't tend to move in the same direction as each other. If one is selling as another is buying then great.
Whilst individual stocks can be more volatile than funds, individual stocks run a greater risk of falling to zero - much less so with funds as typically failures are replaced within the index/fund during their decay process.
Ideally for settings, you do better not rebalancing if the prior trend subsequently continues, or better having rebalanced if the prior trend subsequently reverses. I've increasingly moved to just trading whenever a longer dated moving average such as the 200 day moving average is crossed rather than at fixed 15% (10% SAFE, 5% Min Trade Size) time points. i.e perhaps you might just look at what AIM indicates to be traded (or not) at such moving average crossover time points rather than monitoring on a weekly basis. Rebalance (trade) timing is all very hit and miss. More critical is to actually rebalance. AIM automatically makes you rebalance (assuming you actually follow its advice), which is a big plus on others who may be too fearful to add when prices have declined (in fear of further declines), or not reduce after prices have risen in the belief that even greater gains might follow (greed).
Best. Clive.
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