Contact Author Many have said the most important purpose for investing is to make money. In order to make money we face two key decisions, when to buy and when to sell. Simply put, we must buy when prices are low and sell when prices are higher than the buy price. When markets are low, it can seem like there is no bottom, the market will never bounce back, which makes it easy to follow the herd and sell low. Ideally, what we need is a system that will reduce the emotion of investing by automatically telling you when to buy, sell, or do nothing. In this article we will briefly explain this system then back-test it to see if there is any credence to these claims.
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Contact Author Many have said the most important purpose for investing is to make money. In order to make money we face two key decisions, when to buy and when to sell. Simply put, we must buy when prices are low and sell when prices are higher than the buy price. When markets are low, it can seem like there is no bottom, the market will never bounce back, which makes it easy to follow the herd and sell low.
Ideally, what we need is a system that will reduce the emotion of investing by automatically telling you when to buy, sell, or do nothing. In this article we will briefly explain this system then back-test it to see if there is any credence to these claims.
If you are already familiar with the basic AIM system but would like to see a more detailed analysis, go to this page: Sensitivity Analysis. What is AIM? AIM is an algorithm that provides a logical system for managing your investments. It can be used with a stock or mutual fund portfolio. This system will instruct you when and how much to buy or sell. However, if this value were negative then AIM is telling us to hold. One of the interesting features of AIM is each time that you buy more shares your portfolio control increases by half the purchase value.
This is a built in risk regulator that will stop you from exhausting your cash reserves when the market is going down or building too much of a cash reserve when the market is going higher. However, if this value were positive then AIM is telling us to hold. In both cases AIM has you making the correct decision, buying when your portfolio value goes lower and selling when it goes higher. If AIM is strictly followed it can be used to take much of the emotion out of investing. To answer this question we will use historic stock prices and run the AIM algorithm through its paces.
During this period there has been two downturns in the stock market, one 5-year period of increasing prices and of course the current price increases since March of So we can test AIM through a couple buying phases, at least one selling phase, and get a read on the current market.
Additionally, buy transactions are denoted with red markers, sell transactions denoted with green markers. Then as the market fell for the next two years AIM had us accumulating a total of 79 shares over seven distinct buy signals in February, March, August and September of , and June, July and September of After the market bottomed in , we experience a 5-year period of rising prices.
During this period, AIM would have us selling a total of 42 shares at five distinct selling opportunities in January and December , February and October and April From the market peak in October there is nearly a straight-line tumble until February During that freefall, AIM has us accumulating a total of shares over six distinct buy signals from September to February Finally, the market picked up from March of through July During that period AIM issues 12 sell signals for a total of shares.
Conclusions In spite of the initial purchase being close to a market top, the overall portfolio performance is not bad. AIM appears to do a good job of inventory management and control as exhibited by our cash reserves increasing by However, one risk came out during the second accumulation phase, we very nearly ran out of cash in April If you are interested in obtaining the source data for this analysis in spreadsheet form, send an email to dougburkeaz gmail.
Assumptions for Back-Testing AIM It is always necessary to make some basic assumptions when doing an empirical analysis, here is the list for this analysis: 1.
AIM decisions are based on the closing price of the stock on the last trading day of each month 4. Buy or sell price is the open price of the stock on the 1st trading day of each month 5.
Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Buy Low - Sell High with Core Position Trading™ (CPT)
One of the hardest decisions for a long-term investor is deciding when and how much to buy, and when and how much to sell. The classic and timeless advice is "Buy low and sell high", but many investors act completely the other way round, selling low due to fear and buying high due to greed. Another strong point of AIM-Hi is the ease of operation. The choice of timeframe is up to you, depending on how hands-on you like to be with your investments. Ideally, the system performs best when it is given volatile, high-beta stocks to work with, i. If you are a cautious investor who prefers to buy defensive income stocks you may not get as much action from your AIM program, but at least it will take the emotion out of your buy and sell decisions. This was not such a major problem when Mr.
Robert Lichello Aim Spreadsheet