Replies to post #15 on AIM RE-bal

[lostcowboy]

Hi 2mc,
You said The crucial calculation is the true average cost which is based on LIFO. Do you mean something like this? (Don Carson asked me) This is part of my reply to him.

(Maybe, got to learn more about it. This may be what he is doing

Stock Monthly      Shares   Total Total  Average  
      Price installment  Buy/sell Cost  Shares Cost 
      $25   $100         4        $100  4      $25 
      $10   $100         10       $200  14     $14.3 
      $ 5   $100         20       $300  34     $8.8

Now let's say the price jumps to $15, your stocks are now worth $510, and he wants to sell some. I thank he is using $8.8/$15 to get .58 . At this point I am not sure how much he is selling of the stock value, it could be .58 or (1-.58 =.42), lets use .42. $510*.42= $214. $214/$15= 14 shares(rounded). He says he recalculates a new average cost.

Stock Monthly      Shares   Total Total  Average  
      Price installment  Buy/sell Cost  Shares Cost 
      $25   $100         4        $100  4      $25 
      $10   $100         10       $200  14     $14.3 
      $ 5   $30          6        $230  20     $11.5

The new average cost is $11.5.
Not sure if this is what he is doing or not.)

You said Value can never fall greater than 100% below cost but value can be any percentage above cost. So, there is a mathematical way of muting this disparity or of evening the percentages out. You probably learned this formula in High School algebra. Anyway, it is this that I use for the factor.
Could you post the mathematical formula, it has been a while since I hit the school books, thinks.

Concerning Synchrovest it does not use average buying price. My understanding of average buying price is this, you add up the prices that you bought stock at and divided by the number of prices. Synchrovest does not do this. It does use average cost. My understanding of average cost is, add up total cost and divide by total number of stocks. This is what Synchrovest does.
Note: in my spread sheet commissions are not included in total cost. But I feel they should be.

[karw]

Hi 2mc,

Thanks for your program description.

I understand the average cost calculation(I think). You put the prices on a LIFO stack and when you sell you take some shares from the stack. The stock on the stack will be used for an average cost calculation.

Each sector fund has its own stack and its own calculation. True total cost is total of the stacks.

Understand that you wrote a program for this, this is not easily implementable in a spreadsheet. (I use a very, very simple limited stack for LIFO calculations in my AIM spreadsheets, and that was difficult to develop)

When you talked about the asymmetry in the Value/Cost ratios
you described a solution to this unwanted phenomenon. I assume that you based this solution on your Rebalancing experience. For me it is not transparent, so please can you elaborate a little bit more here.

I totally agree with your remarks about tweaking. Also the use of ETFs/sector funds is a very rational choice in my view. I hope my rebalancing experience will be as fruitful as yours.

Kind Regards, K

[karw]

Hi Matt,

Made a spreadsheet similar to your machine. Made a one stock stack(with multiple stocks would have had a tracker share as you described).
Used the portfolio Value and portfolio actual cost in the calculations.

Sell Amount = Value * Sell factor

Buy Amount = Cash * Buy Factor

Buy Factor = (1 - value/actual cost)

Weighted average price per share = WAP

Actual share price = AP

Sell factor = {(value/actual cost - 1) * WAP *WAP } / {AP*AP}

In this way the Buy and Sells are scaled to a similar amount for 4/9 and 9/4.

Please react, K