Replies to post #45230 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Normally what we do when are cash reserves are above a threshold and the stock keeps going up enough to trigger a sale is convert the sale into Vealie which raises the PC and PC/share price. That keeps to cash level from becoming excessive. I do something similar by incrementing the PC by a percent/year basis to decrease selling.

Vealies do seem like a add surplus cash at a relative high approach. AIM says sell some shares, you oblige and then opt to buy some shares at that time with the cash AIM provided. Albeit costlessly to do so. Incrementing PC sounds like a more efficient way.

Another choice might be to just let cash accumulate and then whenever AIM was flagging buy trades consider expanding the AIM stock value at that time. Increase PC by half the AIM indicated trade amount, and increase PC by the full amount of 'cash' being injected on top.

Or just let it ride as-is. Historically at times even when very high levels of cash have been evident that can swing around to not being enough reserves (see posting #45222). AIM does tend to be a cash cow over the mid/longer term, but that is a form of risk reduction, locks in good gains where even if those gains are kept in cash the overall portfolio performance will tend to be good over the total investment period. Also sooner or later you'll come to spend cash, so a large cash pot might be countered by withdrawals.

Assuming saving for retirement, you could lump all into cash - but that might just pace inflation, maybe worse, assured drawdown to zero if sustained for a number of years. 50/50 stock/cash has better prospects to sustain income and see some real growth/gains. If those gains come early then locking them into cash is a reasonable approach even though that may mean that a former 50/50 had migrated over to being 30/70 stock/cash. Some such as Larry Swedroe even suggest holding 30/70 constantly. Ben Graham suggested 25/75 would be OK if valuations were high, which if the portfolio had deviated to being 25/75 from 50/50 would be indicative of possibly high valuations.

If you're accumulating rather than retired then volatility matters much less. Downside volatility is a benefit as savings are likely being added at relative lows. AIM HI is perhaps the more appropriate there, or even just all-in as soon as savings become available.

Clive.

[Vitaali]

Hi Adam!

Quote:

“What you do is a step above that by actually buying stock at that level to decrease the cash level. So when you buy the stock amount do you increase the PC by the value of the stock or by half of it?”

I don’t use Portfolio Control at all. So there is nothing to increase. I devised my own method that tells me how much and when to buy and sell.

Doing Vealies and not participating in the price rise and locking in those paper profits doesn’t make sense to me at all. Imagine the stock rises, and you do Vealies as it goes up. Then price reverses, comes down to the same level where you started to do your Vealies. At this point your account hasn’t changed in terms of profit or loss. (Maybe you are even showing a loss if you were buying more shares on the way down). You are back where you started. But you could have done a much more profitable thing instead. You could have bought shares instead of doing Vealies, to get your Cash reserve to the proper level. If the price does the same thing as in the first example, you have a realized gain because you were locking in gains on the price rise. In scale trading being proactive is much more profitable than sitting on the sidelines and doing nothing.

Vitali