A.I.M. Users Bulletin Board

[ls7550]

I had a discussion with a "Technical Analysis" person recently. He seemed to think the idea of substantial cash in reserve was really a bad idea

Hi Tom

If you broadly consider stock dividends = cash = inflation (very generally speaking), and AIM stock price (excluding dividends), leaving cash as-is (no interest added), then the results from that AIM will generally reflect the real (inflation adjusted) reward.

For AIM settings of 50% initial cash, 10% minimum trade size, no Vealies, quarterly reviews, since January 1980 such a AIM would have averaged nearly 70% cash reserves when applied to the S&P Composite. The share price only AIM (excluding cash interest and stock dividends) yielded a 3.2% annualised reward.

Proportioning the stock dividends and cash interest according to how much AIM had in stocks and cash combined yielded a 1.4% real return.

So generally the combined cash interest and dividend income uplifted the total amount by inflation +1.4% and AIM trading of the share price motions yielded a +3.2%, which is in effect a combined 4.6% annualised real reward. All with an average of 70% in cash !!! And the worst of (nominal) drawdowns was less than -10% when you include cash interest/stock dividends. [As a comparison guide, 100% stocks yielded a 7.25% annualised real over the same period, but endured much deeper drawdowns].



[Note the last chart above should read "S&P Composite DIVIDEND YIELD" i.e if there was 60% stock and 40% cash then the chart value for that point would reflect (0.6 x dividend yield) + (0.4 x cash interest), adjusted for inflation]

A point of note however is that the turn of the millennium more or less brought an end to the 'compensation' for the 1970's 'defaults' - the poor returns that prompted Robert Lichello to devise AIM. 2000 onwards and dividends and cash interest combined are only barely tracking inflation (whilst during the 1980's and 1990's they exceeded inflation). Similarly however so also have stock price gains also slowed.

Clive.