Replies to post #45 on The "Stock Trading Riches" Investment Sy

[aim hier]

Praveen,

Good to see your board, always nice to hear new viewpoints. I think there are a couple of flaws in AIM and your STR, and I'm going to humbly suggest a fix.

Firstly, I wanted to comment on your $2k per stock constant value, and rebalancing on at least a 10% move. That means you may be selling just $200 worth of stock, and with a 10% move, you are reaping only $20 in profits. What kind of commissions are you paying, at a $7 commission charge, you are giving up over a 1/3 of your profits to commissions. If someone only had $2k, I'd recommend a higher minimum percentage change. Indeed, I'd look at an even simpler model. Invest half of your money in a U.S. stock market ETF and the other half in a foreign stock market etf. Then rebalance annually. If you have new money to invest, divvy it up so that the funds end up with equal amounts of monies. Whatever one chooses, many investors will do better with AIM, STR, or my above system, than with no system at all. Those with no system at all, do tend to invest more at market tops, and are scared into selling at market bottoms.

What are the flaws in AIM and STR? Firstly, there is no time dimension. Imagine that you hold stock in a successful business, that is profitable, reinvesting it's profits, and growing more valuable each year. Yet after a year or two, you are willing to sell it based on it's price relationship to the original value, not it's current valuation. Secondly, these engines, regard price as being as likely to go down as up. If that were the case, you'd do as well by going to a casino. The action is faster and can be alot more fun. But in fact, the market has historically gone up twice as much as it has gone down. It's why we invest our monies, we expect it to grow.

What's a possible solution then? You could increment that constant value annually by an expected growth factor, say 6%.
Thus the $2,000 we started with, we adjust to $2,120 in a year. The following year, we'd increment it another 6% (or 7% or 8%, whatever you deem appropriate). Now, we are gradually increasing our stake in the company, fund, or index. We will make more buys, and record fewer sells. We will be more in tune with the natural movements of the market, trading around the long term advance of the market.