Hi Toofuzzy,
I was just using the gold miners fund as an example, to see what effect a 50% fall in the stock price would have on an overall AIM a/c that started with 50% cash. If you did nothing, you would have 50% of your starting stock value and 100% of your starting cash value, i.e. 75% of your starting total a/c value, a 25% drawdown. But if you do AIM-directed purchases on the way down, your maximum drawdown will be greater - 37% instead of 25%, and this sort of effect would apply to any security. Of course I understand that if you had 100% in the stock to start with your drawdown would be even greater at 50%.
As we both agree, if this is happening to one account and your other AIM accounts are moving in the opposite direction, that's fine.
But my second point was that in a general market downturn like 2002/03 and 2008/09, if your AIMs are all stocks, it's quite likely they'll all go down together, so your whole portfolio is likely to suffer a large drawdown. I fully realise this is, hopefully, a temporary 'paper loss', and the merits of AIM on the hoped-for recovery will become apparent, nevertheless it is a significant statistic about portfolio performance under a given investing system.
Perhaps what I'm saying is that even with AIM you need to manage your overall portfolio risk level by including a large helping of hopefully non-correlated asset classes.
Mebane Faber's 10 month moving average trend following system is just as mechanical and unemotional as AIM - at each month end, if each asset is above it's MA you stay/get in, if it's below, you're out in cash. He reports the average portfolio cash level as 30%. If you want to do momentum as well/instead, you rank the assets by a pre-determined criterion, e.g. average of 1,3,6,12 months returns and go with the top half or whatever - equally mechanical and unemotional. You can even add a risk weighting - return/standard deviation - to that if you want, to guide the choice of asset and/or position size - all mechanically and unemotionally. It can all be done on a simple spreadsheet with monthly input of the relevant data.
As Tom said, perhaps the answer is to run two portfolios, one using AIM and one using trend following and/or momentum. In fact diversifying strategies as well as assets is, I believe, regarded as good practice.
Regards, and still using AIM but constantly reading, exploring and thinking!
Daisy42
