Replies to post #33829 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Since you used the S+P 500 in your example, what was the drop from January 2000 to the low in 2003 and the more recent drop from its high in 2006 ? to the recent low in 2007 ?

I believe if you started at the top or had less than 50% cash at the top you would not have been able to buy at the bottom.

Because I was too aggressive I was not able to buy to the bottom of the recent downturns and I willing to go to 80% cash going forward if AIM selling allows.

That highlights an observation I've made about AIM. Whilst it trades more the further the price deviates away from prior levels and as such produces larger gains when the price mean reverts, on a mathematical basis when exhausting cash and not being able to trade is also considered overall its works out the same as other less aggressive rebalance approaches. Of course its all highly subjective at the individual case by case level.

AIM is form of constant VALUE investing, but where that constant is adjusted upwards over time (Portfolio Control). With CV you never exhaust stock to sell but can run out of cash. You also generally never sell stock at a lower price than paid for the stock.

With constant WEIGHTING you never run out of stock to sell, nor run out of cash reserves, but you might buy back stock at a lower price than previously sold at.

Under constant weighting you might allocate 50% to stock, 50% to cash and rebalance back to 50% equal stock and cash weightings periodically when cost efficient to do so (sizeable deviation has occurred). Another alternative is to adjust the weightings over time i.e. perhaps setting the target stock percentage amount to the VWave indicated amount. Yet another alternative is to set target percentage weights to each of a range of assets and periodically rebalance back to those target percentages (not necessarily equal amounts) i.e. maybe stocks 33%, bonds 33%, cash 34%.

50 / 50 will never be the best but it is "enough" or an average.

That middle road is neither going to be the best nor the worse, but is usually OK



If you have two assets that each achieve the same overall longer term reward - say 10% annualised, but don't perfectly move up and down at the same time, then constant weighting to 50% in each of those assets will provide a higher annualised reward than either of those assets alone.

If you use the calculator at the bottom of http://www.jfholdings.pwp.blueyonder.co.uk/cagr.htm and compare two assets each with a 10% average yearly gain and 20% standard deviation then if the correlation is 1.0 (perfectly in lock-step with each other) then the annualised is 8.2% - the exact same as either asset alone. More commonly correlations between assets vary over time and might average perhaps 0.75%, in which case the annualised rises to 8.4%. If you're lucky enough to ever hit a perfect inverse correlation (one up as the other is down) of -1.0 then the annualised rises to the mean i.e. 10%, and has a 0% standard deviation.

Two risky (volatile) assets that have a low or inverse correlation to each other can as a pair potentially produce above average rewards with very low risk (standard deviation). Fama and French have highlighted how small (growth) and value (depressed) work well as such a pair and how since 1926 small cap value have generally provided both better absolute and risk adjusted rewards.

Jakob Fugger originally advocated holding exposure to business' (stocks), loans (bonds/treasury's), cash and commodities/property type investments in around equal amounts way back in the 1500's. Harry Browne more recently (since the 1970's/80's) continued that concept in suggesting 25% in each of total stock market, long dated treasury, short dated treasury and gold.

[Conrad]

I am the one that is Fuzzy now! None of the replies I am getting appear to address the issue I try to get cleared op so I understand what other think about it.

What you did or want to do and when, or what you think is good enough for you or for Osama Bin Laden, is irrelevant. What is relevant is what happens with of ALL the stock prices in the world over a period of time. . .That what happens can be analysed, but of course, no one is analysing exhaustively all the stock prices in the world and no one will calculate the optimum starting CERs for an AIM investment in each and every stock that is available.

And so, if one is investing in a few companies then the average of what happens with all the stocks in the world over time is not relevant, because only the dynamics of the stock you invest in are relevant, and if you spent only 10 minutes analysing some data of the details of the company about its character and what it does and about the investment climate, then you are better informed than one that has not spend that time on it, Monkey Investment.

So, how can any one keep saying that a Starting CER 50-50 is the best for all cases while that is obviously not true, for in all cases some people know more than others?

And some investors are obviously better investors than others, and that exposes the ignorant investors to far greater risk. . .simply because an uninformed investor with a blindfold on could well invest in a company today about which is already generally known in the investment community that it is about to go bankrupt in the next 20 minutes or so, and he will miss investing in that new company with great potential that has just appeared on the markets.
If investing is a 50/50 coin-toss affair with equal chances to win and to lose for all investors then all the books that are written on it might as well be burned in a energy generation furnace so they will provide some benefit. The Book of Lichello then belongs there as well, and my book The Vortex Method is the one that should be burned along with the others.