Staying safe costlier than living with risk.

[1nvest]

someone who invested [in the US] just before the crashes of 72, 87, 99 and 07 would still have an IRR <10% by 2018.
https://endowus.com/insights/https-endowus-com-insights-the-know-i-ll-invest-when-the-market-crashes-7215add4b1/

V8

Crashes are good for accumulators, additional savings buy at longer term discounted rates. Potentially critical for those compounding the declines with withdrawals for spending.

[1nvest]

Lichello is very entertaining, and I've not run the numbers, but surely this far into a bull run (Covid 'glitch' aside, as it was quite short-lived), if applying AIM you would have already been 100% cash/bonds a long time ago? I'd certainly be interested in the workings behind your plot - I understand AIM is 'damped' to try to avoid ending up all-in either cash or bonds?

US data, S&P500 total return 2000 to 2010 inclusive was near 0% gain/loss, a Bunny period. AIM over that period provided a 60% gain, assuming VFISX short term treasury fund for 'cash'. 50/50 added 40%. Over that period AIM averaged around 40% cash.

In a Bear period stock/bonds will tend to do better than all-stock

During a Bull all-stock tends to be the winner, but AIM will still do OK.

Some AIM'ers I believe pre-calculate the next buy/sell trade price/amounts and leave market orders for such, good till cancelled, one cancels another ... whatever orders. In the past I've/heard some of those being filled when otherwise manual monitoring/trading would have missed the opportunities, short lived spikes up/down that saw their orders being filled.

It's best applied to something that wont go broke, such as major stock indexes as a risk is that it throws all of cash reserves into a declining price on the way down. That said, as it does well with Bunny motions I suspect AIM of a crypto currency might have done very well. I personally know near nothing about crypto currencies.

Jeff Weber applies AIM to LEAPS, long dated Traded Options https://www.bookdepository.com/AIM-for- ... 1071419595 I've also heard of yet others using Options with AIM and stocks, not sure of the detail but along the lines of buying or selling positions at levels and to the amounts that AIM would buy or sell and adding to their rewards somehow (maybe the time-value/decay ??).

I used to apply AIM to CHY (Calamos Convertible and High Income Fund), that threw off something like 12%/year in monthly dividends, broadly where the share price just moved sideways, but where AIM added trading benefits from the Bunny zigzagging such that overall total returns were pretty good over time. But then the rules changed FATCA/whatever where tax/reporting wise that was no longer viable and I sold/closed that position (IIRC over a decade ago now, which is pretty much the last time I used AIM in earnest). Over the years I did run that I built up a considerable amount of US$ holdings sourced from the CHY dividends and AIM trading gains. AIM can throw off loads of cash, and at other times demand lots of cash to be deployed into lower share prices, around that you do have to put in some manual effort such as deploying too much cash reserves elsewhere or reducing other holdings to add the proceeds to AIM. It's not really a be-all-end-all alone (that said you probably could just run it in isolation applied to a major stock index and still achieve satisfactory rewards).

[1nvest]

Staying safe costlier than living with risk

To put some perspective/feel on that ...

For retirees who are drawing income from their investments, a risk is that of a bad period of negative real total returns compounded with income production can draw down portfolio value to critically low levels.

To paint a picture of that compared to a potentially safer choice I used US data since 1930 and partitioned that into decade blocks (calendar decades) and compared all-stock to that of a style diversified stock/AIM/precious metals (I used silver price data given that in the US gold trading/investment was outlawed between 1933 and 1975) equal three way split asset allocation. i.e. stocks for Bull, AIM for Bunny, PM for Bear, that I'll call SD ... "style diversified". Total returns, ignoring cost/taxes and all-stock annualised 6.6% real (after inflation) gains over the full 1930 to 2019 inclusive years. SD annualised 5.7%, so a broad 0.9% annualised lower reward ("cost").

In the worst decade however all-stock lost nearly 30% in inflation adjusted total return (accumulation) terms. If you were drawing a 4% SWR against that then at the end of the decade the portfolio value would have been down toward a third of its inflation adjusted start date value. SD by comparison for its worst decade still had around 90% of its inflation adjusted start date value at the end of the decade.

A risk with seeing your portfolio value down at around a third of its former value is that you might opt to change things. Paramount to selling at (very) low levels and end up being overall worse off compared to others who might have opted to invest in something like SD.

If 4% SWR is all you need and surplus gains are in effect just for heirs, then a 0.9% annualised difference over perhaps 20 years of retirement before the portfolio value is passed on amounts to less than a 20% total difference. Maybe a £1.2M inheritance versus £1M inheritance. But where perhaps for that additional £200K having to maybe endure seeing a large chunk of your retirement portfolio value having been 'lost', albeit on paper only, well that could mean the difference between otherwise having lived for a additional 10 years in the absence of such fright. A 4% SWR relative to a 33% ongoing portfolio value is the same as a 12% SWR at that time, whilst historically such managed to struggle through from there to extend out to a 30 years total SWR period I suspect that would be 'uncomfortable' and pretty concerning.

[spasmodicus]

AFAIK AIM wont ever sell out of shares, but can exhaust cash reserves. There's some detail of the method here https://www.gummystuff.org/AIM.htm

Tends to be a cash-cow, throws off lots of cash, which is useful for those in drawdown. I apply it to the S&P500 index/price once/month adjusted for inflation, which is a bit speculative i.e. a approximation of the most recent (US) inflation CPI index each month ahead of actual formal reporting. Periodically I revise the history in reflection of actual reported inflation rates and find that the differences tend to be relatively small. Standard AIM is applied to nominal price, I find that applying it real price worked better, otherwise I use the exact same method, 10% SAFE, 5% of stock value minimum trade size, monthly reviews.

I just use it as a guide, all on paper. It tends to do OK at indicating appropriate levels of risk to hold over time so is a form of comfort when buying into dips when otherwise fear of further declines to come might have you failing to actually trade/buy. RIP Robert Lichello is saying its appropriate to trade now, to x% amounts and he's more often been right in the past type comfort.

I have long been intrigued by automatic trading strategies, such as AIM, but have never actually run one for any length of time, although I have investigated several home-brew algorithms by back testing. I came to the conclusion that, in certain periods, they could perform “quite well”, but it is very easy to be deceived about an algorithm’s behaviour by ignoring results that turn out bad, or not even knowing about ones that might have turned out well - both very human tendencies. In particular, the AIM method, which I have not tried in the form suggested by your link above, has features which common sense suggests that any strategy should have, i.e.
- tries to stay mostly invested
- a cash buffer
- limits on transaction size and frequency
- buy low, sell high

and some which leave me wondering about it, i.e.
- why 10%? Maybe 12% or 8% would work better. After all, we are always being told that small increments over time, such as 1.5% fund management charges, can make a big difference.
- why is the cash buffer the size that it is and why isn’t its size included in the decision to buy or sell?
- The PC (Portfolio Control) only ever goes up. Why? In a long bear market, this may not be desirable.
- why not reinvest dividends?
- if we diversify our stocks, should they share a common cash buffer?

But I have not read the book, or played with the algorithm myself, so I may be misunderstanding the examples I found on the Internet, e.g. here
https://toughnickel.com/personal-finance/robertlichelloAIMSystem

And another thing, back testing which compares LTBH with a strategy such as AIM needs to be done on a like-for-like basis. The only way to compare the two is to run an IRR calculation based on the timings of the buy, sell and dividend cash flows. This has an important bearing on risk, because the percentage of the portfolio in cash at any moment determines the risk exposure (assuming that holding cash has zero risk, which it doesn’t). Some of the algorithm tests that I have tried resulted in lower total P/L but higher IRR than LTBH with the same starting amount invested. This can happen when holdings are consistently reduced when the stock price is high and increased when it is low, resulting in a better return/risk profile.

This has got me thinking,
regards,
S

[1nvest]

Nearly all investors will cost average into shares over time. Some at retirement like to maintain the number of shares held and only spend dividends, other are content to spend from some dividends, some shares.

Consider one investor who selects stocks that yield 4% dividends versus another who targets 2% dividends with the intent to sell shares to provide another 2%. For the former the firms baseline value/capital declines by the full 4%, for the latter the firms value declines by just 2% and the other 2% is made up by other investors buying shares, perhaps as 2x book value.

All else being equal the latter should see higher/faster share price growth than the former. Also as stocks are more often above average, making new highs the share decline rate is slowed.

Mix in some bonds/cash and rebalancing along with sourcing income from both selling shares and dividends can lead to a situation where the number of shares held is actually higher at times than at the start, and where the average cost per share is lower than at the start. Whilst holding some bonds might induce a lag, lower rewards than all-stock over some periods, in other cases trading/rebalancing across Bunny periods can outperform all stock quite significantly. Compound those types of periods and overall rewards may compare to all-stock but be more consistent (lower volatility, so higher Sharpe).

Generally some bonds, and diversifying income production across both dividends and from capital gains might reasonably be expected to broadly yield the better risk adjusted reward.

[AWOL]

Rob Arnott made the point extremely well in https://www.researchaffiliates.com/content/dam/ra/documents/F_2011_March_The_Biggest_Urban_Legend.pdf which is well worth a read!

"From 1803 to 1857, U.S. equities struggled; the stock investor would have received a third of the ending wealth of the bond investor. Stocks managed to break even only in 1871. Most observers would be shocked to learn there was ever a 68-year stretch of stock market underperformance. After a 72-year bull market from 1857 through 1929, another dry spell ensued. From 1929 through 1949, stocks failed to match bonds, the only long-term shortfall in the Ibbotson time sample. Perhaps it was the extraordinary period of history—The Great Depression and World War II— and the spectacular aftermath from 1950–1999, that lulled recent investors into a false sense of security regarding long-term equity performance."

Invariably these analyses don't take into account the drawdown scenario. Drawdown means you don't get the benefit of buying cheap during the drop in markets. You compound your losses by selling assets. This effect can be damped by having a mix of assets, some of which won't be in a bear market, but this takes fixed income, real assets and equity in order to work through all scenarios.

Equities have won on average by a good margin but a 100% equity portfolio can be destroyed by a protracted bear market. We have been flattered by the brief nature of the dot.com and Financial Crisis crashes. Drawdown just makes the need for diversification stronger. Now if not leaving an inheritance, and ones life expectancy is short and assets enormous then who cares. For the rest of us we have a choice of potentially expensive diversification across real assets, bonds and equities or risk of catastrophic failure and distress.

[dealtn]

For the rest of us we have a choice of potentially expensive diversification across real assets, bonds and equities or risk of catastrophic failure and distress.

And returning to employment to increase income, and reducing expenditure ...

[AWOL]

For the rest of us we have a choice of potentially expensive diversification across real assets, bonds and equities or risk of catastrophic failure and distress.

And returning to employment to increase income, and reducing expenditure ...

Shhhhhh, shudder. Unfortunately I have been out of employment for over a year and headhunters have told me that I am therefore now unemployable especially at 50 therefore it would be a matter of spending less as you point out.

[dealtn]

For the rest of us we have a choice of potentially expensive diversification across real assets, bonds and equities or risk of catastrophic failure and distress.

And returning to employment to increase income, and reducing expenditure ...

Shhhhhh, shudder. Unfortunately I have been out of employment for over a year and headhunters have told me that I am therefore now unemployable especially at 50 therefore it would be a matter of spending less as you point out.

So cutting grass, pulling pints, posting letters ... all now impossible now you have reached the dizzy heights of 50. There are very few people who are unemployable. Sure you might not be (re)employable in your previous field (especially if it allows you to retire at 50, and requires headhunters to fill vacancies). But for those whose pension pots are beginning to be below where they might be due to investment performance and/or drawdown, they have plenty of employment opportunities to top up for beer or holiday money.

[Moosehoosenew]

Don't forget dog walking as an option.


4 dogs, £20 each, 90 minutes equals over £50 an hour, some of which you may choose to take cash in hand.

[Charlottesquare]

The secret I think is never being forced to sell.

If timing is always your own call, and investments are diverse with spread risk, one hopefully just rides out the ups and downs. These are of course famous last words as we are not yet retired, maximum 4.5 years to go.

So whilst we could retire now that would mean, prior to state pensions kicking in, eating into SIPPs etc/taking final salary occupational pension age 61 with reduction, in my view waiting is safer to reduce risk of reductions in later retirement income due to drops now with limited working time left to recover these drops

So in our case it will be core income from two state pensions and one occupational pensions which ought to be sufficient to cover all recurring household costs and have a reasonable, though maybe fairly static, retirement, the money purchase SIPPS, ISA's etc will then hopefully provide the frills which we may or may not want to enjoy through retirement. (Other things are making our lives more straightforward, selling our second home (if I can ever get there) and fairly soon we will drop a car)

[1nvest]

The secret I think is never being forced to sell.

If timing is always your own call, and investments are diverse with spread risk, one hopefully just rides out the ups and downs.

Most average in progressive savings at a above average price, stocks are often making new highs. If you're lucky periodically prices decline and additional contributions buy in at a below average price.

Averaging-out more often sells some shares also at a above average price but may at times see some being sold at a below average price. Diversification reduces the risk of selling-low, for instance bonds might be down relatively little, or maybe even up when stocks have declined.