Replies to post #37472 on A.I.M. Users Bulletin Board (AIMUSERS)

[The Grabber]

RE: AIM S&P Real since 1871

Hi Clive and thanks.

On your S&P since 1871, I think it very interesting, especially regarding the relative performance given half as many $ at risk.

If only someone could live so long as to be able to turn 100k into 100m.
Is that 100k starting point inflation adjusted? If so, what was the value in 1871 dollars?

[ls7550]

RE: AIM (of Real values) since 1871

Generally stock price (only) might broadly grow with inflation plus perhaps GDP. They'll also pay a dividend which in this context might be considered as the real reward. Setting AIM to 0% SAFE, 10% minimum trade size will simply add or reduce after each 10% move in real share price, and uplift Portfolio Control after each buy (compensatory increase to reflect GDP)

I believe that AIM'ing real values is more productive (rewarding) than AIM'ing nominal values.

With 50% average stock (50% cash), 10% minimum trade size and close to 2 trades/year (269 trades over 142 years) on average = 5% of portfolio value on average via a AIM buy trade each year (assuming one buy, one sell on average each year), which uplifts Portfolio Control by 2.5% on average each year (broadly speaking) in real terms.

If stock prices generally = inflation + 2.5%, and dividend values generally track share prices, and cash generally also provides a similar reward as dividend values, then there's a degree of imbalance towards the cash side accumulating more/faster than the stock side when dividends are also being added to AIM cash (cash expands by it interest earned plus the dividends from stocks).

That longer term AIM highlights such by having generated 62% buy trades versus 38% sell trades i.e. it was broadly cost averaging in additional amounts over time. Which is a good way to add in additional amounts (rather than lumping in an amount at a single date/price).

Centralising AIM around inflation (real values), supplemented with cash accumulating via cash interest and dividends combined and deployment via cost averaging in over time appears to generate a better outcome than AIM'ing nominal values/prices.

Asset prices in real terms can be quite volatile and adding when the assets real (inflation adjusted) value is low, reducing when the assets real value is relatively high conceptually yields a > inflation outcome even if the asset (and cash) both just generally paced inflation longer term (you're trading the zigzag motions around inflation).

If you look at the Drawdowns chart in the AIM charts I posted earlier at the Wall Street Crash years, AIM applied in the above manner walked those bad years, spiking down only relatively briefly. The Wall Street Crash was more harsh in nominal terms than real terms as there was a degree of deflation over those years. In other cases however real declines have occurred due to high inflation, such as around the WW1 and WW2 years. Under such conditions AIM was nigh on as bad as buy and hold, primarily due to inflation outpacing all other assets. My guess is that overall the best choice of cash would be to hold inflation bonds rather than nominal bonds and had such bonds been available in WW1 type years then the real AIM portfolio value drawdowns would have been considerably less (but in turn that would perhaps have made the Wall Street Crash dips deeper/more prolonged). Or there's the halfway middle of road choice of cash being invested in both conventional and inflation bonds.

Cash has to be liquid as AIM might call upon a sizeable amount of that to be deployed at any one time and you want cash to have preserved (or more preferably grown) its purchase power at that time. A three or five year ladder of such inflation and conventional bonds would seem reasonable as assuming 50% average cash and 10% loaded in each of 5 bond ladder rungs, you'd have more or less 10% cash in hand (maturing bonds) constantly (near as), and another 10% maturing in a year or less such that the capital values might be relatively close to its maturity price. The bonds should be safe bonds i.e. Treasury issued not corporate. Typically a 5 year ladder of bonds provides the average of the 5 year yield reward, but does so with T-Bill like capital risk (assuming each bond is held to maturity). Generally a 3 or 5 year bond ladder will track inflation/yields reasonably closely. In some cases it might be more appropriate to sell one of the longer dated bonds (maybe the 4 year for instance as its price capital gain might make it an appropriate time to profit take) to service a AIM buy stock trade than it would be to deploy the shorter dated cash holdings into a stock purchase. You'd just have to evaluate that at each individual buy trade time and pick the best choice at that time.

[balbrec2]

Found this to be interesting as well. The 50% invested providing 85% of the fully invested return
made me think of this graphic on the Vanguard investors website.
At the bottom of the page it shows relative performance of various stock/bond portfolios. The one showing a 50/50 ratio
provided 83% of being fully invested in stocks. Coincidence?
Keep up the good work, I get a lot out of reading all your posts.

balbrec2

[ls7550]

Just to clarify

The stacked green coloured cash and blue coloured stock values in the first of these charts is scaled to the left hand Y-axis, which is log scaled, which makes cash look much more heavier. i.e. the top of the blue bar is the combined sum of both cash + stock value.

I had to log scale that axis otherwise you don't get to see much/any of the earlier years. Linear scaled is more or less just a flat line over most of the earlier years and then a large up-rise for later years.

A better visual guide as to cash reserves is the second chart which shows the cash reserve % weighting over time.

Cash reserves rose somewhat abruptly (if a decade+ long period can be classified as being abrupt) from the 50% initial start date level (1871) up to 80%+ levels as in the late 1870's there was predominately deflation, whilst cash was earning something like a +5% to +6% nominal return i.e. was exceeding 'inflation' by close to 7%/year real.

Whilst nominal share prices broadly sideways zigzagged in the late 1800's, real share prices rose strongly, dividends were good and so was cash, as such 'AIM of real share price' accumulated much cash reserves, depleted stock exposure during those years. Which turned out to not only be rewarding, but also a reasonable precursor to the sizeable declines in real share prices in the early 1900's (up to WW1 years).