Many new AIM'ers often compare performance of AIM relative to buy and hold without fully accounting for cash. Cash type investments shouldn't be overlooked so lightly.
There's a whole range of possibilities for such cash. Another factor to keep in mind is that when stocks go down, cash relatively out-performs stocks.
Some might use just a single cash deposit account. Others use other alternatives, for example using a treasury ladder or perhaps a treasury barbell (treasury's are loans to the government and are pretty safe as if the government is under stress it has the option to raises taxes or take other measures to avoid bankruptcy).
A barbell is holding both short dated and long dated treasury's, perhaps holding some with 2 years until maturity and and others with 20 years until maturity. A ladder is holding perhaps equal amounts in one year until maturity, two years until maturity and three years until maturity (I personally prefer a 5 year ladder which also holds some 4 year until maturity and 5 year until maturity). Each year the maturities all move down a year, so you use the proceeds of the most recent maturing treasury to buy a 5 year maturity (in the case of a 5 year (step) ladder - for a three step ladder you'd buy a 3 year until maturity treasury each year).
In the case of a 5 year ladder, after 4 years each of the steps would have bought into the treasury's at the 5 year duration (you can see the yields that the various durations currently are priced to at http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/ ) so you end up with the average of the 5 year duration yields, but are exposed to an average of the 2.5 year risk (typically shorter duration treasury's are less risky than longer dated treasury's), i.e. you are rewarded a relatively above average reward for the amount of risk taken.
When blending such a ladder with AIM, when AIM asks for more funds (to buy stocks) you simply sell some of the shorter durations first to service AIM (and progressively move up to selling longer durations if needed). Similarly if AIM throws off more cash then you just buy more of the next 5 year (or whatever choice of ladder span you opt for) than would otherwise have been the case.
Yet another option for cash is something like the Permanent Portfolio that is comprised of 25% in each of stocks, gold, long dated treasury's and short dated treasury's. IMO the long and short dated treasury's can equally be held in a ladder instead (i.e. perhaps 50% in a 1 to 5 year treasury ladder instead of 25% in each of shorter dated and long dated).
Clearly 'cash' isn't just a simple matter to be lightly ignored. If you do ignore the potential benefits and rewards from cash then you'll be more tempted to taking on too much stock risk (likely allocating too much to stocks and too little to cash). When cash is correctly accounted for then you'll likely be more accepting to holding more cash than might otherwise have been the case.
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