AIM and Relative Strength
Generally Indexes rise over time through a smaller number of out-performers. The majority of stocks under-perform the collective average. We can measure this effect both in the real world case and via random price series generation based on actual daily averages and standard deviations. Market Cap weighted funds (S&P, FT100 etc.) exploit the characteristic - and are in effect relative strength based. AIM however is contrarian to the relative strength effect, typically selling out of holdings that might potentially be one of the few that go on to make further and considerable gains (10-baggers).
We can however relatively easily install an element of Relative Strength characteristic into AIM'd accounts. One method is to create your own virtual sector index funds by buying a range of stocks from within the same sector and then AIM those as a collective (single (sector) AIM).
Repeating for a range of sectors we can then AIM those individual sector AIM accounts as a collective (single market-wide AIM).
It's a lot easier, for reasons that will become apparent below, if at the offset you allocate near identical capital amounts to each stock in each individual sector group, and have each of the sectors near equal capital amounts at the offset.
At the top level (market-wide AIM), when a AIM buy occurs buy the stock in the strongest sector having the strongest price relative strength, no matter which sector may have generated the buy signal. When a AIM sell occurs sell the weakest price relative strength stock from the weakest sector, no matter which sector may have generated the sell signal. The measure of price relative strength can be easily performed by comparing the capital values at the time for each individual sector (providing equal amounts were originally allocated to each sector at the offset).
Similarly at the individual sector AIM level, when a buy signal occurs then buy the strongest price relative strength stock in that sector set. When a sell signal occurs then sell the weakest price relative strength in that sector set. (Again if equal capital amounts had originally been allocated to each stock in the sector at the offset then identify which stock to buy/sell is simple).
The effect of this arrangement over time is towards concentration. At the extreme you'd end up holding just one sector AIM account with one stock in that sector - with that sector and stock being the one that exhibited sizeable price relative strength. Conventional market cap weighted indexes typically address the concentration by limiting the size of the largest single component stock - commonly to 10% maximum as a percentage of the total index value. There are obvious risks with such concentration and, like conventional indexes, we shouldn't let the collective become too focused - which can be avoided by periodically shutting down and restarting afresh (preferably when you perceive the current strongest sector/stock may have run its full course).
Unlike conventional market cap. weighted indexes that simply hold the strongest stock/sector, the above outlined approach dollar cost averages additional capital into the strongest stock/sector at the expense of selling out of the relative weak. So not only does the approach circumvent AIM's relative price strength issues, it potentially enhances the RS effect.
Clive.
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