Hi Mike.
That stop-loss style is just my way of redeploying AIM's 'cash' reserves to potentially better the return on that element.
During Bull periods cash can act as a drag (underperforms stocks).
During Bear periods cash generally outperforms stocks.
The stop-loss style that I use typically has you 50% of the time exposed to stock and 50% of the time in-cash and as such provides a return around midway between average cash and stock returns and thereby (generally) provides a better return than cash alone. Which reduces AIM's cash-drag effect.
Each month I tally my total cash reserves and divide that by 12 and then open a (market) index position with two stops. A time-stop set to 12 months after that date and a stop-loss set at 5% below the purchase price. If the stop-loss is encountered at any time during the year I close the position and cash-deposit those funds for the remainder of the 12 month period (exclude them from being counted as 'cash', but deploying the funds if required by AIM to purchase stock).
If therefore AIM averages 50% stock, 50% cash, then typically that 50% cash part when applied to this stop-loss style will end up being 50% stock/50% cash exposed and uplift the overall average stock exposure to 75% stock, 25% cash.
When you add on the stock price volatiliy capture gains that AIM makes then you're much more likely to compare with buy-and-hold (or better) though having greater average stock exposure.
The style of the stop-loss method however is such that the cash reserves remain intact for AIM to call-upon. Yes that value might decline 5%, but between dividend income and/or cash interest that is reduced (or even eliminated).
Typically I find that around 38% of such positions run the full year without being stopped. The average gain in such cases is around 25% (including dividends). Which amounts to a 9.5% average gain. Of the stopped positions that lose 5%, typically cash and dividends received against those restore the original value (assuming 5% average yield/cash interest).
Making a 9.5% average gain on AIM's 'cash' reserves significantly reduces cash-drag compared to perhaps 5% for conventional cash deposit rates.
I like to consider this style as a Taleb style. Whilst Taleb tends to deposit the large proportion of funds in risk-free and make highly speculative plays with the remainder (high risk/reward), generally using Options, in my case I achieve a similar type of effect, but using an alternative approach.
In truth I would use this stop-loss style as my only investment style if it were not for the 'dry' years you have to endure (investment income is my sole source of income) as I can't afford the draw-downs. Typically with this style you have a series of dry years followed by a series of good years. More recently I have been considering only applying this style whenever Don Wilson's Tango5 was indicating a buy/hold condition, and not starting (staying in cash) when T5 indicated a sell/out condition.
A principle benefit IMO is that you're much less inclined to push AIM's stock exposure levels (have too little cash reserve). You might even consider completely reversing the upward bias in stock vs cash levels that Mr Lichello advocated over the years and perhaps instead start AIM accounts with 33% stock, 66% cash type levels.
So this stop loss style is not part of AIM, just my personal extension to AIM.
Best.
Clive.
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