A.I.M. Users Bulletin Board

[ls7550]

I was using the "classic AIM" settings which are Lichello's original parameters from 1977. I see if I use more aggressive settings results improve.

Don't forget the bottom line.

AIM cost averages down the average cost of stock over time to a point where the shares you hold might have cost nothing (or even have a negative cost).

De-risking is also a form of value-add. For instance, 1993 to recent, a SPY AIM with 25% initial cash, 25% Vealies, 10% minimum trade size and 10% SAFE generated a similar (slightly better) reward to buy and hold, averaging 25% cash reserves over the entire period. Had I allocated 32% of total funds to such a AIM then I would have averaged 24% in stock overall, but achieved 32% stock like total rewards. Which is similar to 8% (of total funds) of cash value having earned stock like rewards. Cash (VFISX) over the period earned 4.4% nominal total gain, whilst stock earned 8.7%.

Or put another way, 24% of stock, 76% of cash, earned a similar reward to had I invested 32% in stock (68% in cash) on a buy and hold basis (with all of cash assumed to have been invested in VFISX short term treasury fund).

If you opted for say a 50-50 stock/bond asset allocation, you could alternatively allocate 50% to an AIM of that stock, perhaps using 25% initial cash reserves within that AIM, and potentially end with a similar reward to having invested in a 50-50 stock/bond asset allocation, but having done so with less risk (perhaps 37.5% average stock overall).

Expanding minimum trade size to 10% will reduce the number of trades AIM flags, down to levels perhaps not dissimilar to that of having opted to buy and hold 50-50 and rebalance once each year.

I used to think Vealie's (http://web.archive.org/web/20120811055900id_/http://www.aim-users.com/diction.htm#q7) weren't a particularly good choice as that's like adding in more into stocks at a time when AIM was indicating a sell (and hence share price was potentially relatively high). I've subsequently changed by view on Vealie's however and see such as being a form of momentum play. Often after having sold some stock as indicated by AIM the share price will continue to rise such that not having sold would have been the better choice. AIM is a 'value' type play which tends to have a degree of low/inverse correlation to 'momentum'. Vealie's add an element of momentum into an otherwise all 'value' type mechanism and as such is a degree of additional diversification.

Adjusting AIM settings will change the Hold Zone (http://web.archive.org/web/20120811055900id_/http://www.aim-users.com/diction.htm#q6) For historical values there will be an optimal choice of AIM settings that yields the best reward. That however is just data mining and out of sample (future) share price motions are unlikely to repeat the historic motions - and as such a different set of AIM parameters are more likely to be the better choice. Perhaps the choice of period you tested were better suited to more aggressive AIM settings. In other cases the opposite might occur (less aggressive settings). The simpler choice is to just set and forget AIM settings at some median level between the two (i.e. set to average AIM settings).

5% minimum trade size, 10% SAFE settings create a 30% hold zone. 10% minimum trade size, 10% SAFE have a 40% hold zone. As a comparison Harry Browne's Permanent Portfolio uses a 40% hold zone (suggests you hold 25% in stocks and rebalance back to 25% weighting if the stock weighting rises above 35% or declines below 15% i.e. 35/25 = 1.4 and 15/25 = 0.6 which are both 40% distant from the target 25% weighting amount). 40% moves in share prices occur relatively frequently - for example year high/year low for share prices are often >40% apart, such that 30% to 40% hold zones are a reasonable overall average choice.

Clive.