Replies to post #1694 on A.I.M. Users Bulletin Board (AIMUSERS)

[OldAIMGuy]

Hi Barry, Congratulations on a great investment in Acme Widgets. Why didn't you tell me about it a year ago - I could have used something that doubled in the last 12 months!!

In the first instance, there is the same amount of cash in the account as the beginning and the account has doubled. It would appear that there must have been a dip or so along the way which reduced the cash reserve to a lower percent of total to have end up so.

In the second instance the person doesn't know any more than the first which way the price/share is going to travel. Because this person has $10,000 being placed at risk and looking at history shows that the stock has the ability to decline periodically as well, the larger cash reserve is logical.

The first person is most likely nearest the Sell end of the Hold Zone with a double in total value and only 25% Cash on hand. The Cash is probably being refunded. This means that a deeper discount in price/share will be necessary before Investor One will buy than Investor Two. Investor Two only needs to satisfy SAFE and Min Order requirements to get to a buy. Investor One needs to drop from near a Sell point all the way through the entire Hold Zone to get to his first purchase.

I don't think either is "right" but after a few seasons, probably both accounts will come into some synchronization of both Buy/Sell Prices and also ratio of the Equity and Cash Reserves.

Jeff Weber spent a lot of time with AIM and made several choices as to how to run his Equity Warehouse. One was that he felt the need to diversify. Therefore if there was excess cash available in an AIM account it was possible to use it to gain diversity in investments. This led naturally to the idea of "rebalancing." In our discussions he usually talked about the situation where Investor One started with $10,000 (half in stock and half in cash) and a year later had $20,000 but was $15,000 Cash and just $5000 Invested. Then he felt it might be a great time to rebalance by taking $5000 of the Cash and thinking about a new investment.

Maybe we can finally get Jeff W. to sign on here and bring his thoughts to the table.

Best regards, Tom

[aptus]

Hello Barry,

Logically I would think (all other things being equal) that there should be no difference between people starting an AIM account today and others starting one year ago (i.e. they should have the same PC and Cash/Equity ratio, assuming their portfolio values are equal).

However this opens a very large can of worms. Why only rebalance once a year? Why not once a month? Or once a week? Or once a day? Or once a second? Everytime the stock value changes we'd have to look at potentially rebalancing (as if we were starting with this new portfolio value at that exact instant in time).

And, of course, there would need to be a definitive set of criteria that allowed us to choose which method was "better." (We might arrive at these criteria using backtesting or some other method.)

This strikes me as being very similar to the deep diver discussion over at SI a year ago ( http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=15592221 )

That one was still left unresolved and I think your point will also be unresolved. Everyone will do what they think is best for their particular situation. However from a logical point of view, what people choose to do doesn't always make Spock-logic sense.

Regards,
Mark.

http://www.automaticinvestor.com

[lostcowboy]

Hi Labestul, Are you heading in the general direction of Tom's Vealie? It would take care of Rebalancing and adjusting the Portfolio Control.