Replies to post #23 on AIM UK

[ls7550]

Hi Tom

one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.

One of the reasons for my long term IH signature of A penny saved is a penny earned - Benjamin Franklin

I'm already signed up to John Mauldin's newsletter and had already seen the article before AIMster's posting.

I've used a stop loss based strategy along the lines as outlined in the iBox for many years now as the core of my investment style, and that's performed much the same as your Fraternity account by avoiding a significant amount of the the 2002/03 declines. Doesn't make as much during Bull periods, but doesn't lose as much during Bears.

I know that you base your Fraternity account on iWave as I've followed your historical reports with great interest in the past. Nice to seen an update, thanks.

I've personally found that simple time diversification is just as good as any other more complex technical analysis based arrangements. One position started each month with 1/12th of the total funds, 12 overlapping year long positions, each with a 5% stop loss or 12 month time-stop. When stopped the accumulated dividends and cash deposit returns help counter the year on year total loss.

So far this year January's stopped out, but I rolled that failure into April's start. Feb through April are showing current gains (having been started at 5851, 5745 and 5430) of 6%, 8% and 14% respectively as of the present time. I haven't started May's position yet, but will do over the next week or so as I'm moving from month start position opening to mid month based openings. I may be wrong but the feel I get is that the start of each month is more active, and that moving to mid month will avoid that additional volatility/intensity.

The stop loss plays serve as my price appreciation capture and downside loss limitation component parts. AIM like volatility and downside cost averaging plays potentially add to that investment return.

Best regards. Clive.

[ls7550]

In the article mentioned by AIMster this AM one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.

I find this true in my own account many time. If the market drops significantly and my management model keeps my losses smaller, then I don't have to 'outperform' to such a great degree on the next uptick. Maintaining the relative lead through the next swing of the pendulum builds the long term outperformance.

One thing I have noticed in the past is that in attempting to limit downside losses, such as through holding part cash part stock, the risks can be higher than you might initially anticipate.

If you burn cash and end up 100% in stock too quickly when the stock price continues further south, then you end up with comparable downside losses from that point to that of buy and hold, but may have only partially gained from any previous upswings that buy and hold enjoyed full exposure to when you were only partially invested in stocks and stock prices were rising.

LD-AIM for instance magnifies the downside risks by effectively raising the bottom price at which you become 100% invested in stocks. Classic AIM also has a deficiency here as typically the next buy price level after a previous buy trade is too close (typically the first buy after starting an AIM account is around 15% below the start price level, consecutive buys after that first buy however typically occur at around a 2% or 3% lower price than that of the previous buy trade price level).

This is a principle reason why I personally prefer a bottom up approach of identifying a bottom price level at which I'm relatively content to become 100% loaded in stock at and structuring my trades according to that value. Equally it's the reason why I use a modified D'Alembert style that only starts investing after an initial downward price step rather than investing straight from the start price level.

By delaying by one downward step the cost averaging is improved. For example a 6000 start price level and 5000 and 4000 lower levels using a straight off approach would invest 33.3% of funds at each of those levels, an average of 5000 overall. Delaying by one step down means the average lowers to 4500 (50% in at 5000 and a further 50% in at 4000).

When the stop-loss component manages the Ladders cash reserves, then having 0% invested in the Ladder at the offset doesn't mean we miss any gains if the stock price rises, just that those gains are trapped by the price appreciation (stop-loss) engine instead, possibly even to a greater extent.

Clive.