Replies to post #1410 on Advanced Automatic Investor

[OldAIMGuy]

Hi M, Re: AIM performance compared to Buy and Hold........

One needs to understand other aspects of investing besides total return. If Buy/Hold is 100% invested, for instance, then Buy/Hold is 100% at risk for whatever the market does. If AIM, on the other hand performs equal to Buy/Hold but does so with an average of just 75% invested over the same period of time, then it has had superior risk adjusted return even if the total return is the same.

There's also "Upside/Downside Capture" as a measure. If one is using AIM and consistently captures 90% of the upside moves of the investment while only capturing 75% of the downside moves, then again each cycle will put the AIM closer to Buy/Hold and with enough cycles, surpass buy/hold in total return and performance.

AIM is a very long term business plan for investing. It takes many price cycles to do its work effectively.

I hope this helps in your thought process. I came up with a method of gaining perspective on AIM vs Buy/Hold or Market Timing. It's is called ROCAR. (Return On Capital At Risk). It's acually return on average capital at risk for the length of the investment period. If one takes the total return percentage and divides it by the average amount that has been at risk, then one gets a risk adjusted return.

Let's say that Investment A returns 12% for Mr. Buynhold. Mr. AIM invests in the same Investment A but uses AIM as the guide over time to manage the risk of the investment. Mr. Buynhold is 100% invested for the total time frame, so his ROCAR is 12% divided by 1.00 which is still 12%. Mr AIM managed a 9% return on his AIM managed investment in the same security. However, he was, on average over the same time frame, only 70% investes. His ROCAR would be 9% divided by 0.7 or 12.85%. In other words, the same investment worked harder than Mr. Buynhold's over the course of time.

While you can't deposit ROCAR at the bank, it helps us to understand the risk adjusted return on the investment. Cash when not being utilized, is essentially giving us a risk free rate of return. So, if an investment in SPY turned a 93% total return for Mr. Buynhold, and Mr AIM turned in an 85% total return it appears that AIM failed the test. However, if it turns out that AIM only was 70% at risk on average and turned in a total return that was just 8 percentage points less that being 100% at risk, then which is superior?

The goal then is to achieve the best total return AND the best risk adjusted return. THis is true whether we're market timing, sector switching, AIMing or Lump Sum Buy/Hold. The market timer who turns in 12% but is invested 100% for only 80% of the time has a higher ROCAR than does Mr. Buynhold for the same return. Same with AIM. The system that provides consistently higher ROCAR for the same total return is the system that is truly winning.

Best regards,

[OldAIMGuy]

Hi M, Re: Risk and Return, further comments.........

This comes from Howard Marks' book, "The Most Important Thing - Uncommon Sense For The Thoughtful Investor"......
(ISBN: 978-0-231-15368-3 )

High absolute return is much more recognizable and titillating than superior risk-adjusted performance. That's why it's high-returning investors who get their pictures in the papers. Since it's hard to gauge risk and risk adjusted performance (even after the fact), and since the importance of managing risk is widely underappreciated, investors rarely gain recognition for having done a great job in this regard. That's especially true in good times.....

Best regards,

[Toofuzzy]

>>>> AIM does not appear to have an advantage during upward periods<<<<


Well DUH!

First if you are not 100% invested in stocks at the bottom you can't possibly perform as well as buy and hold.

Second AIM has you selling as the market goes up so you are not holding as much stock at the top.

That is like saying AIM does better as a stock declines compared to buy and hold. Well of course it does.

First you are starting with 50% in cash so you have invested to lose and second you are buying more at lower prices.

You need to compare AIM to a diversified portfolio thru at LEAST one market cycle.

Toofuzzy

[byculla]

So it would appear that AIM provides almost the same perfomance as B & H but at a lower risk. No 20% p.a. advantage.
Is there a management system that beats the S&P as that is the oft stated standard?

[ls7550]

Around four years ago I ran some extensive tests of AIM over a range of periods and assets and came to the conclusion that if you weighted to the same average stock/cash weightings as what AIM averaged over the investment period and periodically rebalanced (yearly or at bands such as +/- 40% i.e. start with 25% weight and rebalance back to 25% target weighting if the weighting declined to 15% or less or rose to 35% or more) then you came out with similar overall results. In that context AIM might lose out in practice as it tends to trade more often (higher trading costs). The plus side however is that AIM automatically navigated to reasonable weightings - whereas that average weighting couldn't have been known in advance for the fixed weighting approach.

If for instance it was more appropriate to initially weight to say 40% stocks/60% cash fixed weightings over the investment period than it was to weight to 50-50, then AIM would tend to have averaged closer to 40-60 weightings over the investment period.

MPT efficient frontier is a conceptual thing. The efficient frontier is dynamic and can't be predicted in advance, only measured with hindsight. AIM has the tendency to navigate close to the efficient frontier. Whilst (generally) there will be more (and less) rewarding alternatives, being close to the efficient frontier provides the better risk adjusted reward.

Clive.