AIM Stock/ETF Trading Account Setup
Stock/Cash Allocation and Portfolio Control
Table of Contents
Definitions
Introduction
Important: About the Cash Reserve (CR)
AIM Account Setup with no Stock Yet Held
AIM Account Setup with a Stock Already Held
Establishing the Account Cash Reserve by selling some stock held
AIM Account Setup with a Stock Already Held
Establishing the Account Cash Reserve by adding cash to accompany
the stock held
AIM Account Setup with a Stock Already Held
No Cash Reserve (Caution!)
Portfolio Control Initialization Note
Example
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Definitions
AC = an AIM Account.
CR = The Cash Reserve for a specific AC
PoCo = The Portfolio Control for a specific AC
SV = The Stock Value (value of the item) for a specific AC
Introduction
Each stock, mutual fund, ETF, or other item has its own AIM Account
(AC), comprising the shares, ounces... whatever, of the item and
the corresponding Cash Reserve (CR) for that AC.
Some AIMsters combine several items into one AC, but I don't.
The AIM Calculator Program is used for an item only after an AC has
been established for it.
You can have several ACs with one broker. All the cash is held
comingled by the broker, but you keep track of how much is
allocated to each AC.
In setting up an AC for an item, the first decision you have to
make is the initial percentage of the total AC value to be
allocated to the item (SV) and how much to the Cash Reserve (CR).
Lichello in his earlier book editions, for a sideways market, used
a 50% allocation to the initial SV and 50% to the CR. In later
editions, in a rising market, he gave the option of a 70%
allocation to the initial SV and 30% to the CR.
Tom Veale (http://www.aim-users.com) has derived what he calls the
"Idiot Wave". This could assist you in choosing the initial SV/CR
allocation, based on current market conditions, if you don't want
to choose an arbitrary 50-50, 70-30, or whatever, allocation.
Note, however, that the "Idiot Wave" allocation recommendations are
for the general market, and not necessarily applicable to any
specific sector, which could be contra-cyclical.
As of 2004-08-28, if I was setting up an AC for something in the
general stock market, such as the QQQ ETF, I would allocate just
30% to the SV and 70% to the CR. If I was setting up an AC for a
precious metals stock, I would reverse that -- 70% to the SV and
30% to the CR.
The initial SV/CR allocation is a judgement call on your part.
Important: About the Cash Reserve (CR) Cash, the CR, is an important part of the AIM method. If you are not able AND willing to put more money from the CR into an item -- even if it declines substantially -- you should not be playing the AIM game with that item. The purpose of the CR is to enable you to BUY LOW when the price of the item declines. And, on price rises, you SELL HIGH to replenish your CR. In the event of a 50-60% decline, you would have to put into the item an additional amount, from your CR, roughly equal to the value of the item at the start of the account. The exact amount depends on the specific AC buying history . If your CR percentage is 30%, your CR will be used up after a SV decline of about 1/3. If your CR percentage is 50%, your CR will be used up after a SV decline of about 1/2. If your CR percentage is 70%, your CR will be used up after a SV decline of about 2/3. AIM Account Setup with no Stock Yet Held This alternative assumes you are initially in all cash for your AC. After you determine what your SV/CR allocation is going to be, you just buy your item with the cash allocated for the SV. You can buy all at once, or stage in over a few days or weeks. The TOTAL cost, for the shares AND the commissions, becomes your initial PoCo value. AIM Account Setup with a Stock Already Held Establishing the Account Cash Reserve by selling some stock held If you already have some holdings which you want to convert to an AC, your first option is as follows: Using the previously determined SV/CR allocation, you could sell of a sufficient portion of the stock held to obtain the cash with which to set up the CR. The initial PoCo value is the market value of the remaining stock in the AC at the time you sell what is required to generate the CR. (What you previously paid for it is IMMATERIAL -- period!) AIM Account Setup with a Stock Already Held Establishing the Account Cash Reserve by adding cash to accompany the stock held If you already have some holdings which you want to convert to an AC, your second option is as follows: Using the previously determined SV/CR allocation, you add enough cash to the AC to bring the CR up to the percentage desired in the AC. The initial PoCo value is the market value of the stock in the AC at the time you set up the CR in the AC. (What you previously paid for the stock is IMMATERIAL -- period!) AIM Account Setup with a Stock Already Held No Cash Reserve (Caution!) You could set up your AC without selling any of the item and with no CR. The problem with that is that you will need to come up with the required cash from somewhere else to BUY as AIM recommends if you have had no prior SELLs to generate some cash for those BUYs. In any event, in this case, the initial PoCo value is the market value of the stock in the AC at the time you set up the AC. (What you previously paid for the stock is IMMATERIAL -- period!) Portfolio Control Initialization Note The initial value for Portfolio Control (PoCo) is simply set at the value (SV) of whatever item you are putting into the AC -- at the CURRENT market value, NOT whatever you paid for it. Cash, whether raised by selling some of the item, or added from "outside" into the AC, has nothing to do with PoCo. Cash (the CR) pays no part in the AIM calculations. You just need to make sure that you have the cash to implement any AIM BUY "recommendations". Example Say you have 500 shares of XYZ stock. This could be your intial holdings or the amount left after you have sold some to raise cash for the CR of the AC. The cash proceeds if you have sold some, or the cash added from elsewhere, have nothing to do with PoCo. Whether you paid $2 for those 500 shares (put $1000 into them) or paid $10 for them (put $5000 into them) is immaterial. If the present price is $5, your PoCo is $2500. Even if you did sell some shares to raise cash, leaving you with the 500 shares, again, that cash and the shares sold have nothing to do with PoCo. Look at it this way: If you were starting with just cash, without any holdings, and you put $2500 of it into an item to start the AC, your PoCo would be $2500. Again, what you also put into the CR has nothing to do with PoCo. Cash pays no part in the AIM calculations. You just need to make sure that you have the cash to implement any AIM BUY "recommendations". --- return to http://www.bean-d.com/cpt/aim-stock-etf-transaction-calculator.htm --- this is cpt faq-aim-stock-trader aim-stock-account-setup. Copyright (C) 2004 - 2006 David A.Bean buylow-and-sellhigh AIM/CPT blog end
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