Advanced Automatic Investor

[aptus]

Hello Jack,

I remember having a similar discussion with a few AIMers (I think one was Bernie Goldberg) many years ago. My logic is as follows...

1) If I start a new AIM portfolio with a 50/50 cash/equity split and invest $8000, then according to the AIM algorithm I have to purchase $4,000 of equity and keep $4,000 in the Cash Reserve. PC would be 4,000.

2) If I did (1) yesterday and then realize that I actually meant to start the portfolio with $10,000 rather than $8,000, then what should I do? Should I (i) add $2,000 to the Cash Reserve and leave PC at 4,000 or (ii) add $2,000, purchase $1,000 of equity and adjust PC to 5,000?

My view is that I should do (ii) as that will put my portfolio into exactly the same state as if I had initially invested $10,000 rather than my incorrect $8,000.

In that case, the passage of time (whether 1 day or 2 years) should not matter (as AIM does not take time into account, just changes in equity value). So if 2 years later I decide to add cash to the portfolio, I should follow the same rules as I did when adding cash 1 day later.

That's why AI adjusts the portfolio control for external cash deposits.

On the other hand, Dividends can also be viewed in a number of ways. When handed dividends there are 3 possible ways to think about it...

1. Place the dividend in the cash reserve and treat the change in share price as a market change.

2. Use the dividends to purchase additional shares so the stock value remains the same.

3. Place dividends in cash and treat the decrease in market value as a non-AI transaction (so decrease PC).

AI implements option (1) so no change to PC is made.

Interest can be handled by adding it to cash with no adjustment to PC.

So you can see that I believe AI implements the correct way to handle external cash infusions. However I know many AIMers don't see it that way. In that case AI gives the option to directly change PC (as you did) or use the Dividends and Interest option so PC is not affected.