A.I.M. Users Bulletin Board

[daisy42]

Re: AIM and low beta stocks

I read somewhere on this forum, or on a source linked to it, that the ideal stock for AIM is one with a beta of 1.4 (sorry, I can’t provide the link). One could then modify the standard 10% SAFE in proportion to this, so for a general market fund – S&P500 tracker – with a beta of 1, you could calculate SAFE as 1/1.4 = 7 (approx.). For a stock with a beta of 0.89, you could try 0.89/1.4 = 6.4 for SAFE.

In setting the initial cash proportion, I think you need to decide how much downside you want to allow for, in the sense of being able to continue buying in accordance with AIM’s instructions. The Cash Burn Chart (http://www.aim-users.com/cashburn.htm) shows that if you want to allow for a 50% drop, with SAFE at 10%, you need 50% in initial cash. If SAFE is smaller, either you cannot keep buying as far down, or you need to increase the initial cash proportion. The two parameters are linked.

To set the initial cash proportion for US stocks and broad-based funds there are the two VWave readings – these presumably assume a SAFE of 10%.

I have recently moved to using the 5 year low as my guideline, as being more generally applicable, because I AIM various funds for other regions of the world, and also I am UK –based. For example if the fund would have to fall in price by 50% to reach its 5 year low, I would allow 50% initial cash with 10% SAFE.

But rather than use standard, static 10% SAFE settings, I use ‘dynamic’ SAFE settings, with total SAFE based on the relative volatility of the fund, and the distribution of SAFE between the buy and sell sides kept in proportion to the position of the current price between the 5 year high and the 5 year low.

Because I’m using index-tracking mutual funds I don’t have beta figures, so I use published 1 year volatility figures. I compare these with the standard deviation of the annual returns of the S&P Composite, which is 18.82 over the period 1880 to date, and I assume a SAFE of 1/1.4 = 7 would be appropriate for this general market index. My FTSE All-Share tracker fund currently has a 1 year SD of 11.04, so SAFE is set at 7 x 11.04/18.82 = 4. The published volatility figures are updated once a month, so the overall size of SAFE will rise with an increase in volatility, which we can expect to see if the market starts to fall significantly. In this way I can be comfortable with a smaller SAFE in periods of low volatility like we have experienced recently, with the initial cash proportion set on the basis of 10% SAFE, and related to distance to the 5 year low from the current price.

So currently my SAFE settings are on the low side, and at or close to 0 on the sell side, with a 5% minimum transaction, with nearly all the combined SAFE on the buy side. The indicated initial cash settings are around 50% for the US, UK, Asia-Pacific and Emerging markets, but somewhat lower for Europe and Japan. (The highest ever figure from price to 5 year low for the FTSE 100 is 57%, reached in the last few days of 1999. The current reading is 46% and the average is 38%.)

This approach has given me quite a few 5% sales across most regional markets during 2013. Obviously the profits will not be as high as with 10% SAFE, but I quite like realising some of the profit after such a run up in the markets.

Daisy42