The stop-loss style I use is applied at the index level.
Start with two cash pools, CP1, CP2. Initially all of funds are allocated to CP1.
Each month CP / 12 = that months new (long) position. Each new position established with a 5% stop-loss and 12 month time-stop.
In effect 12 year long rolling positions.
Each day check each of those at or near end of day and if the intra-day low is equal or less than the stop then the position is closed (even if the price has subsequently rebounded above the stop loss price level by the end of day). Each stopped position has its proceeds deposited into CP2 where it stays until its associated time-stop date after which that cash is moved back into CP1.
Applied to an Index this stop-loss style will have low year on year draw-downs, yet achieve near comparable longer term investment return to buy-and-hold. Goes up less in Bulls, down less in Bears, so that pacing is not constant.
All of this however is virtual, but at any time the total collective provides an overall indicator of stock and cash levels.
I would use this style alone, however AIM adds value, in that its return on capital at risk is greater than buy-and-hold. So instead I in effect AIM stocks to capture that value-add benefit rather than using an Index fund. Typically the stop-loss style averages around 60% stock exposure time in total, so it makes sense to run AIM with 60/40 stock/cash initial allocations which aligns the two. Over time however as the stop-loss style and AIM changes stock exposure levels then it’s a question of realigning the two using an additional index long or short position. If therefore the stop-loss style says 10% stock and there’s 66% of total funds in AIM stock value then a 56% short index adjustment is required - to achieve that 28% of the total 34% cash reserve is used to buy something like SDS (double short).
You’d have to throttle back AIM from going less than 33% cash when using the likes of SDS. I however have access to up to 10x and am therefore less impeded by that restriction (I can extend AIM’s up to around 90% exposure/10% cash). I’ve seen (but can’t recall the EPIC) for 3x shorts that are around, so they would enable cash reserves to be allowed to reduce down to 25% if that were your only choice.
I also use a 200dma indicator now for the stop-loss style and each month if the current price is less than the 200dma then CP1 / 12 capital amount is immediately sent to CP2 and a twelve month date is set against those funds (after which they move back into CP1).
So fundamentally at the AIM level it’s a usual block standard AIM process, running AIM as you would do in the normal manner. The stop-loss side is used to manage an additional index long or short index position.
Providing AIM stock performance (ROCAR) equals or betters the index and if cash = dividends = 5% then this overall style has pretty low drawdown risk (potentially zero year on year drawdown) whilst potentially bettering buy-and-hold and with less volatility.
If you go back to http://investorshub.advfn.com/boards/read_msg.aspx?message_id=37066420 I showed how a 50/50 AIM stock = long index, AIM cash = short index, produced a 1.8% benefit. That is in effect AIM’s value-add benefit. As that applies to only 50% of funds on average then AIM’s ROCAR uplift might be considered as being of the order of 3.6% relative to the stock. And that’s using just a boring index fund.
I assume you are not using a stop loss order in conjunction with AIM. That would seem very contraditory to me.
Yes it is contradictory. You end up with situations such as AIM buying more stock and at the same time adding more short. The way I look at it is as a form of arbitrage, where you’re playing off the stock against the index in such cases. What matter most however is that it works overall. Testing the stop-loss style alone using an Index from 1800 shows around a 10% average benefit compared to 8% for buy-and-hold. Add in the extra that AIM’s ROCAR brings to the party and I would expect (but haven’t tested) results to be yet further improved. Yet in many respects it’s safer overall both than buy and hold and than AIM alone.
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