Replies to post #1289 on Advanced Automatic Investor

[Toofuzzy]

Hi chrismac100

The one risk with AIM is you buy a stock that goes to zero. With funds you will tend to have less volatility but you avoid that risk. So I use mostly ETFs. You want to avoid the inverse and 2 and 3X ETFs because they do not track their indexes accurately enough.


If you are going to start an investment with $10,000 in stock and $5,000 cash it takes a lot of money to diversify enough to not mind losing one account.

Toofuzzy

[aptus]

Hello Chrismac,

ETFs are an excellent choice for AIM given 2 constraints.

1) The ETF should hold highly correlated underlying equities. This is because AIM thrives on volatility and if the ETF is holding uncorrelated equties, some volatility will be diversified away.

2) The fees associated with the ETF are relatively low (here I'm referring to the management fees, not the brokerage commissions -- although those should be low too).

If your portfolio is large enough, it is reasonable to hold some high-quality individual equities that you are very familiar with and have had the time to study in detail, and hold some other type of industries or sectors, that perhaps you are not familiar with or have not had the time to study in-depth, as ETFs.

For example, you might want exposure to gold stocks or Chinese technology stocks. You might not know much about gold stocks and might not know anything about individual Chinese tech stocks. In this situation, a good ETF holding gold stocks and another holding Chinese tech stocks would be less risky than actually trying to construct a portfolio of individual stocks.

In Automatic Investor, you would put each ETF into a separate portfolio and use the Asset Allocation function to tell you the proportions.

There's a blog post you can read here --> http://www.pragmaticinvestor.com/blog/2009/09/04/how-to-use-etfs-for-safer-more-secure-portfolios/

As Automatic Investor's developer, I can't really answer your second question in an unbiased manner. However I can say that since I developed the first version, over 10 years ago, I have updated it to include numerous actual user suggestions and am very confident that the majority of AIMers, who use AIM software, like it very much and place it at the top of the AIM software heap.