I previously mentioned how my trading system is build around constant value investing. Another system that is based on this technique is Robert Lichello's AIM system.
Here, I will discuss how Robert Lichello's AIM system answers the "Questions to Build a Constant Value Trading System".
These questions need to be answered in order to develop a complete system around constant value investing.
Here is how Lichello's AIM system answers the questions:
1. Lump Sum or Periodic Investment - AIM was meant to be a lump sum system where you would invest, for example $5,000 or $10,000. However, you could invest more money once in a while by adjusting the control.
2. cash - In the case of AIM, Lichello initially recommended a 50-50 split between stock and cash. Later, he increased it to 2/3 stock, 1/3 cash. In the latest edition of his book, he recommended 80% stock, 20% cash. Lichello did not propose a way of handling excess cash. The cash would just build up in your account.
3. Running Out of Cash - Lichello does not really deal with this, except that he mentioned that you can add more cash if you have it.
4. Investment Choices - Lichello did not give much guidance in this area.
5. Control Value(s) - Lichello advocated one control value for the portfolio. His control value would increase by half of any amount added if value dropped, and it would increase by the full amount of any new money added.
6. growth - AIM makes no provisions for growth. Excess cash simply accumulates and the control only increases on buys.
7. risk - AIM assumes risk is controlled because the portfolio is diversified. Also, between rebalancings, any stock can be replaced by another, as long the same dollar amount is bought.
8. Rebalance Frequency - A potential rebalance is done monthly or quarterly. However, a SAFE value is then calculated (equal to 10% of the stock value). Rebalancing only occurs if, and to the extent, that the difference exceeds SAFE. For example, assume the control is $10,000, and the stock value is $12,000. SAFE is then $1200. Since $2,000 is greater than $1200, a sale will take place, but only for $800.
If you are interested in learning further about Lichello's AIM system , you can buy it at Amazon.com.
Sunday, 4 April 2010
Lichello's AIM System
Posted on 23:36 by Unknown
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