Here are some Questions and Answers to help you with your AIM portfolios........



These have been assembled over the last few years and should help both the seasoned AIMer and the new user of AIM. Also note that there's comprehensive FAQs at this site:

A.I.M. In-Depth Questions Bulletin Board.

Q1. How is your overall portfolio structured as far as stocks and mutual funds go?

A1. About 2/3 of my portfolio is committed to individual stocks and 1/3 to mutual funds. The mutual fund portion has grown to this level from 0% in 1989. The performance of the funds is so good I wonder why I mess around with individual stocks! The reason is that I enjoy the research (and the bragging!!).

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Q2. How do you go about picking stocks and funds for AIM? Are there any good sources?

A2. First of all, there are lots of people on the AIM Bulletin Board that can help you in selecting equities. There is also a newsletter by Jeff Weber , an AIM user since 1986, that concentrates on stock selection for AIM. Jim Battaglia. always has fresh thinking on mutual fund selection. He uses a bit of Technical Analysis to time his initial entry into new funds and has something for the moderate as well as the agressive investor. Finally, I have a Mutual Fund Selection Guide here at the AIM Users Group pages that list excellent mutual funds and how they should relate to AIM.

Selecting the right equity for AIM is VERY important. AIM has its own personality and one needs to choose the stock or fund to match it for maximum returns. Mr. Lichello spends very little time on this issue but you should think seriously about it.

Personally, I like to buy stocks with very high BETA ratings (1.4 or higher). BETA is a measure of a stock's volatility as compared to the market as a whole. Value Line lists the BETA rating of each of their stocks in the upper left hand corner of their stock sheets. I'm also a fan of stocks with low debt/capitalization percentages (25% or less). I like survivability! You'll find this data in the left hand column of the Value Line stock sheets. I also screen Value Line for stocks with very low Stock Price Stability ratings (25 or lower) and you'll find that reading in the lower right hand corner of the page. Further, I look for stocks with a moderate Price/Book Value ratio (2.0 or less). You can calculate this from today's stock price divided by Value Line's current year estimate of Book Value. Value Line is available at most public libraries and most brokerages also subscribe.

For mutual funds, I screen Forbes Magazine's annual issue on funds rated A+ in bull markets and F in bear markets. These ratings are consistant from year to year changing only as the funds themselves grow in size. This issue comes out in late Aug. or early Sept. and should be on file at most libraries. From that list I also look for funds with less than 1.25% annual cost. I then look to see if the fund has consistantly beaten the S&P 500 over the long haul. With those things as screens, the list should be appropriate for AIM.

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Q3. What's a reasonable # of shares to own of a single stock for an AIM account to work?

A3. First off, I don't trade odd lots or less than 100 shares at a time. I also rarely trade less than $1000 of a stock. This keeps my commissions to less than 5% of the transaction's cost. In my "business plan" I must control costs where I can and this is one of the few controlables. I find I don't get a very effective trading range on stocks if I own too few # of shares. For instance, if you own 300 shares of a stock and use a min. of 100 shares for trading, that represents 1/3 of your portfolio. So, the price must change by 33% before you approach your next buy or sell point. Plus or Minus 33% makes a trading range of 66% from a buy to a sell! That's beyond most stocks regular range so therefore you don't get enough trading to make AIM practical. What I do under these conditions, is to put together a "mutual fund" of stocks with common character- istics or which are in the same industry and trade them as a group. It makes deciding which stock to buy or sell a bit more complicated. I've usually sold the biggest gainers, and bought the biggest loosers in the group (assuming the fundamentals haven't changed). I usually want to have 500 shares or $10,000 in a stock to trade it as an independent AIM account. For AIM accounts with less than $10,000 total including cash reserve, I'd suggest a mutual fund as you will get more action and not get eaten up by commissions.

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Q4. Mr. Lichello was advocating a 50% cash reserve in his origional book on AIM. In the latest edition of "How To" he now says that we can get away with 33% cash reserve for starting up. You, with the Idiot Wave, say that the cash reserve should be determined by the market conditions at the time of starting the AIM account. What should I do?

A4. I have started my AIM accounts with anywhere from 0% cash to 90% depending on the stock and market conditions as I perceived them at the time (or by the luck of the draw, as ocasionally I've had NO cash available!). I don't use margin since I don't like debt and don't feel it's appropriate for my "business plan". You can start AIM 100% invested, sell into any rallys to build a cash reserve. But if the market turns against you first, when AIM says to buy, you'll just have to ride out the storm. If you don't have cash available, this is a possibility. I don't recommend Margin or any unnessessary debt, but if there was ever a "rational" way to use Margin, however, AIM would be the way.

My Idiot Wave is designed to be fairly conservative in its cash reserve recommendations, so if you do start with stocks or funds and use the Idiot Wave for your guide you should have enough cash to buy to the bottom of most market corrections.

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Q5. Have you used Lichello's TWINVEST and do you like it as well as Dollar Cost Averaging? What is this TERMVEST?

A5. I've used TWINVEST for the college money I've saved for my kids. It works great. You might want to get Junior a social security card and start Twinvesting into a good (volatile) mutual fund for him/her! Also if Junior is earning any money, you may want him/her to fund an IRA with the proceeds. The earlier an IRA is started, the greater the benefit of differed taxation.

As the example in Mr. Lichello's book (chapter 15) shows, Twinvest managed to duplicate Dollar Cost Averaging's successes with less risk and also with a cash reserve established for the eventual roll-over to an AIM account. This is still the best 'thrift plan' that I've been able to find.
TERMVEST - My brother came up with a clever use of the Twinvest idea. Let's assume that you have received a windfall of $10,000 from a bonus at work or a kindly Aunt. You already have various AIM accounts going and to throw $10,000 at any one of them would choke them with kindness. You want to get the money into the market, but aren't confident that it's a great time to sink that kind of cash into a new investment. That's where TERMVEST comes in.
Let's assume you decide that this money should be deployed over the next 12 months. You feel that if you put in a smaller amount each month that maybe you will do better than just lumping it in right now. Here's how to figure the amount to use with TERMVEST. Take the total amount to be committed, divide it by the number of periods in the term. The result is the value that you use with Mr. Lichello's Twinvest for the term.
In this example, we want to complete the project in 12 months (that's the term) so we will use 12 as the divisor. So, $10,000 / 12 = $833 per month that we'll Twinvest. For the initial period, Twinvest would have us invest $625 and keep $208 in the cash reserve. Each month Twinvest will tell you what the appropriate amount will be to invest. At the end of 12 months, your account will be fully committed to the new investment, with equity and cash reserve proportional to what the market's demands have been. At that point, you start up AIM. Total the costs of all the equity purchased during the 12 month term and use that for your AIM Portfolio Control. There you have it. TERMVEST! A special thanks to George Veale for this idea.
The Newport program can be used in its present form for making a twinvest account. You will still have to do the one calculation manually, but then you use the ADD feature within the TRADE window.

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Q6. I'm concerned about the transaction costs with all the "trading" that AIM seems to indicate is necessary. Where do I start with my modest size account?

A6. I think that you will find that you will not trade as often as Mr.L's book might lead you to believe. In doing AIM models of stocks and mutual funds I've found that the more trades you make, the more money AIM makes (within reason). Remember, with SAFE at 10% for buying AND selling, you have made a minimum of 20% from a buy to a sell. This should be more than enough to cover commissions or other transaction costs. In reality if you set a minimum of 100 shares of a stock for trading, this expands the BUY/SELL range beyond the 20% and covers costs nicely.
For smaller accounts (under $10,000) Mutual Funds offer the greatest cost efficiency, ease of trading and performance. Check that the minimum $ amount for a transfer is in line with your portfolio size. Say no more than 10% of the equity side of your account (5% is more desirable).
I average about 4 trades per year with my mutual fund accounts. Individual stocks might have more or less trading per year depending on the specific equity. My overall portfolio of stocks and mutual funds has averaged 3.5 trades per year in recent times. If you are used to short term trading, AIM's slower pace may come as a surprise. AIM doesn't trade just to make the broker happy and won't churn your portfolio if you have set it up correctly. For me the chang of pace was refreshing. It ended my Stock Ticker Addiction!

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Q7. I own some stocks that I've determined are good AIM candidates but have had them for a long time. So how do I start my AIM account? Origional cost? Today's price?

A7. This is a difficult question. If you don't have a source of Cash Reserve available for your new AIM account, you may want to consider selling some shares of the stocks to fund the cash side of AIM. Then you start with today's price and go from there. Only Uncle Sam will know that you started at a lower price.

If there has been growth in the stock's price since you bought it and you use the origional price, AIM may have you sell enough to fund your Cash Reserve correctly. However, if it was purchased for $1/sh and it's now at $10/sh, AIM would have you sell too much and over-fund your Cash Reserve. In this case I'd just sell enough to have the right amount in the cash reserve and start AIM with today's price.

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Q8. You've said that you have played with some of AIM's internals and have had better performance. Can you tell us more about this?

A8. I've found by using a long history of a stock's or fund's price I can learn how to modify AIM slightly to maximize the return. I learned that if I use a separate SAFE value for buying and selling (Split SAFE©), I can customize my AIM portfolio to the "personality" of the equity. In the case of Ultra Fund, I set SAFE at 8% for selling, but reduce it to 0% for buying. This helps to compensate for the upward bias of the funds's value and keep me more fully invested. Over time it really makes a big difference.

I have also used a reduced SAFE on both the sell side and the buy side for those stocks where I have 1000 shares or less. Say I have 500 shares of a $20 stock. If I'm going to trade 100 shares lots then 10% safe is probably too much. I then reduce the buy and sell SAFE values equally to get the trading range to about what the 52 week highs and lows have been. That way I will get more trading activity and make more money.

Users of the program called Newport for running AIM will find this adjustment easy under the Maintenance window. It's called Buy and Sell Resistance there. Once a change has been made, then view the line graph and see if the Trading Range Indicator on the right of the screen matches the stock's or fund's actual trading range for recent history. If it's still too big, try trimming SAFE some more.

© VEALIE - Another change from Mr. L's origional plan I use with my AIM accounts is to limit my selling. If after an extended period of upward movement, like the '91 to '93 period, I find myself with too much cash (say over 50% for stocks and 33% for mutual funds) I quit taking AIM's sell advise. I, instead, pull a VEALIE© and take the dollar value of the sell market order divided by 2 and add that amount to Portfolio Control. This eliminates the sell order and moves the next buy and sell prices upward at the same time. I will continue doing that with each new sell order until the cash reserve is diluted to about what the Idiot Wave is suggesting at the time for stocks and funds. Then I start to sell again just as AIM would like. If cash reserve gets too fat again, I just repeat the same proceedure. This change allows me to stay more fully invested, expand my risk envelope slightly and participate in long term rallys as they come along. Using the Vealie I attempt to keep the cash reserve within about 10% of what the Idiot Wave is suggesting (IW says 33% cash, I keep my cash between 30% and 33%)
I thought it would be instructive to do a comparison of what Mr. Lichello's AIM "By the Book" would have done several years versus what AIM massaged by my IMPROVED methods.
I had a nice history of Ultra Fund handy so that's what I used. Please note that these examples include NO TAXES, as though this was an IRA type account. Interest was calculated at 5% for the entire period. Please take time to study the graphs at the AIM Improvements page. As you can see, AIM "By the Book" comes up on the short end of things. Using the VEALIE© to control the Cash Reserve plus the Split SAFE© gives the best results while still having reasonable risk management. With a bias for accumulation and a logical maximum cash reserve, we managed to better AIM "by the book" by nearly 3X.
I think it's fair to say that in a bull market, the person that's more heavily invested will do the best. So, we can conclude that keeping a lid on Cash Reserve and pulling a VEALIE© will eventually win over just using the Split SAFE© all by itself.
Hope this food for thought has some meaning for all of you. I wanted to give an example of what the potential of AIM is when these two very simple methods are used enhance its activities. These methods are quite useful for mutual fund investors. They do not apply directly to the ownership and AIM management of individual stocks. Stocks require a higher cash reserve and also a different spread for the Split SAFE.

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Q9. If AIM is so good all by itself, why do you trouble yourself with the Idiot Wave?

A9. Over the years I've been asked by friends if TODAY is a good day to start investing or is the market too high or low or too crazy! I never had a really good answer for those questions, so I created the Idiot Wave! Now I have a reason for my opinion and can show it to people. It gives me a cash reserve recommendation each week for starting a new AIM account and it is usually better than an arbitrary 33% or 50%. Mr.L. says that ANYTIME is a great time to start AIM investing. I agree, but some times are better than others! If I'm starting a new investment I use the IW to determine the appropriate cash reserve size. If the market is at extremely low risk of going down, why carry a 33% cash reserve into battle? On the other end of the spectrum, if the market is at very high risk, why invest with inadequate cash reserves?

In studying how the IW reacted to the '87 run-up and the "crash" that followed I found that if I was to start an account at 83% invested at the low risk period following the crash, that I had more than enough cash to last out the market bottom and buy into it. Further, my gain the following year as the market started to recover would have been that much better than starting at only 67% or 50% invested right at the bottom of the market.

The IW in it's present form has ranged in advice from a low of about 17% cash reserve to a high of 56%. It seems always to have been able to have picked a reasonable cash reserve that was better than a "fixed" %.

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Q10. I have a question about getting started with AIM/Newport. I noticed that there was a difference in the BUY & SELL price depending on which way I get started. When I input a stock that was bought at different prices on different dates as AIM buys, I get completely different buy and sell indicators than if it is set up as being all bought at once at the average price. Is this correct? If I use the trading range generated the first way, my first sale of shares is at a loss, but if I use the range generated the second way, I would not.

A10. The main controling factor of AIM is the Portfolio Control (PC) value. It's established with the initial purchase of shares whether it is all at once or in multiple buys. It's adjusted as more shares are accumulated by AIM instructed buys. Only half the value of the AIM purchases is added to the PC. So to start, you should use the TOTAL cost of all shares purchased as your starting point and your PC will be equal to that total.

AIM says that if you have been using the program and buying, you should then replenish the cash reserve asap. This may mean selling some shares at a loss to your origional purchase price. Usually it is only at a slight loss overall, however. The important thing here is that the portfolio is up in value from where the last buy was made. AIM can't work without buying power, so it'll try to raise cash as soon as possible after a spending spree. If the stock settles into a lower trading range before finally breaking out, AIM will generate trades to work off the expensive shares while back-filling with cheaper shares.

Another method I've used with friends that have no initial cash reserve is to set the PC by a different method. Let's assume that you have purchased a stock for $10 per share and you bought 1000 shares. You didn't know about AIM at the time so you didn't save any cash for future buying. If the market price turns against you, you're stuck. However, seeing the error of your ways and wanting to establish a working AIM account, you then could set the PC to 9091 instead of the usual 10,000. This means that you will start to get some sell signals AS SOON as the stock reaches its initial value. To get this adjusted PC number, take the total cost of all shares purchased to start. Then divide it by 1.10. This will give you the starting PC you need to get going while only selling shares at a profit. This assumes that your Sell SAFE is set at +10%.

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Q11. Newport is advising me to sell 100 shares of my stock when it gets to $30/sh. I turned on my computer today and found that the price is now at $36/sh. How do I determine how many shares I should sell at this price?

A11. In Newport you should bring up the stock screen in question. There in the lower right corner you will see a "?". If you hold down the SHIFT key and the ? at the same time you will bring up the "What If" window. Type in today's price of $36 and hit Enter. It should tell you how many shares should be sold at that price and how many dollars that represents. It's given two ways since for mutual funds you may be more interested in the dollar value of the order than the # of shares.

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Q 12) Have you examined the tax consequences of AIM trading? At what point does it become profitable to buy shares back after selling?

A 12) A friend and fellow AIMer sent me an article he'd clipped out of the paper regarding the tax consequences of trading. There's no doubt that Uncle Sam is the single most benefited partner in our investment business. The article was titled "Selling to protect market gain is risky - Big Decline needed to buy stock back,and profit". The article relates that if you sell shares to protect a gain (Much like AIM does) you must not be too quick to buy shares back. Well, what's too quick? You really need to combine the federal tax rate and your own local rate to see what the combined bite is. However, for simplicity I'll just use the fed rate for these calculations. If we assume 28% capital gains tax for eachof the examples, you just need to adjust the examples for your own state.

Example #1. No Load Mutual Fund - Assume that AIM has told you to sell $500 worth of the fund, and that you have a $150 profit on that sale.

You sell at_________________________ $500

It cost you___________________ $350

Capital Gain__________________ $150

Fed. Taxes @ 28% __________________ $42

What you have to reinvest____________ $458

To buy the same number of shares back again with what you have to reinvest after taxes would require the price to fall by 9.2%. If you bought back sooner then you would be just churning your portfolio with only Uncle Sam benefitting. A bigger discount gives you a better range beyond this break-even point. So if the stock was at $10 when you sold, you should have set up the combination of your Min. for Trades and Buy Resistance (SAFE) to give you a Buy Price of less than $9.16.

This same scenerio is true of stocks, but you should then also take into account the cost of commissions.

Example #2 - Common Stock traded with commissions. You sell 100 shares of a stock at $10. You paid $7 per share.

You sell at_______________________ $1000

It cost you________________ $700 (incl. purchase commissions)

Deduct Sale commission _____ $50

Capital Gain ______________ $250

Fed. tax @ 28% ____________________ $70

Repurchase commission______________ $50

What you have to reinvest____________ $830

In this case the price would have to drop to $8 1/4 to assure that you could buy 100 shares back with the NET proceeds of the first sale. This is a 17.5% drop in price. You would want the combination of your Buy Resistance (SAFE) and minimums for trades to give you near that same price.

These discounts from previous sales are near what I would usually use, but the concept is a good one to keep in mind. If we extrapolate to the point that the stock sale is Pure Profit, we can see that we'd need at least a 28% drop in price to cover the cost of taxes plus whatever the commission's percentage of transaction would be.

My friend bought into a stock at $17 and using AIM, sold 100 shares at $22. At what price should he repurchase shares using this method?

He sold at__________________________ $2200

His cost___________________ $1715 (incl. purchase commissions.)

Deduct sell commission ________$42

Capital Gain_________________$443

Fed Tax @ 28%_____________________$124

WI State tax @ 2.8% _________________ $12

Repurchase commissions_______________$42

What he had to reinvest______________ $1980

AIM/Newport actually told him to repurchase in the low $17s while the tax method said it would be okay as high as $19 3/4. AIM is indicating that you should be profitable as well as "generous" to the Internal Revenue Service.

I always try to make more than the broker as my first goal after profitability has occurred. It's then nice to make more than your silent partner, the IRS, as well. If the stock or fund that you've chosen doesn't provide a trading range large enough to be profitable to both you, the broker and Uncle Sam, then you should consider another equity or re-examine your reasons for being involved with this particular equity. Hope you enjoyed this "food for thought"!!!

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Q13. How do you handle your AIM accounts? Longhand? Electronic Spreadsheet? Is there software already done for AIM?

A13. When I started using AIM in Jan. of 1988 I kept the files longhand on a monthly basis. I found that I was filling up my 13 column paper with information but getting very few buy or sell recommendations. I then worked on formulae for "predicting" what the next buy and sell points would be for the minimum shares or $$$$ I was willing to trade. Knowing in advance what those prices were, I then quit keeping the sheets monthly and only filled in a line when there was a trade. Next I worked with Bob Norman who was handy with Lotus 123 and he helped me build a 123 based template for AIM. I've used it pretty much as we designed it up until fall of '93.

Bob Norman of Newport Programs then developed a stand-alone AIM program called NEWPORT that does everything the old 123 template did and more. If you get serious about wanting to use AIM and want to do it easily, I'd recommend your investigating this software. It's available as a DOS or WINDOWS based version specifically to run an AIM account, with graphing capability similar to the graphs that I send out, and does all the calculations for you. All you do is input the prices of your stocks and funds once a week. It takes me about 2 minutes to update ALL my stocks and funds (about 26). I then can print out all the BUY/SELL/HOLD recommendations for the week on a single sheet of paper and carry it with me. I can view each stock or fund individually, view it graphically, and print out the total portfolio value including the breakdown of cash and equity and a simple P&L. It prints the graphs as well. This is much easier and faster to use than the old 123 template and much more Goof Proof! It also takes up only 200K of disk space compared to the 5+meg for Lotus, etc.! It's Application Specific for AIM, and NOT Bloatware!

NEWPORT was written and developed by fellow AIM users and friends of mine Bob Norman and Dave Ratatori. They spent an incredible amount of time writing the program and it shows. It is specifically designed to track an AIM account, but can keep a history of your non-AIM accounts as well.

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Q14. I have been studying Mr. Lichello's methods for several years. I have been using his methods on my retirement money and now have an IRA worth about $48000. Recently, I bought stocks for the first time and have a portfolio of 6 issues. I am using AIM to manage the portfolio and it now is signaling me to sell. Which stocks do I choose to sell? The ones which have increased the most? or the least?

A14. When using AIM to manage a basket of stocks, you are acting much as a mutual fund manager acts. This is a tough call from 'over here', but here are some things to consider that may lead you to the correct choice as to which stock(s) to sell. I've done the same form of management in the past, so know your dilemma.
First thing I would look at is how appropriate each equity is to the AIM system. It wouldn't do you any good to sell off juicy AIM stocks and be left with steady growers that won't generate much AIM activity. You are going to want the remaining stocks to have high BETA (volatility), low price stability, probably low long term debt, and good but ERRATIC growth. Obviously you want stocks that are in industries that have excellent long term potential (electronics VS horseshoes).
Next, examine the motives that got you involved with the stock in the first place. Were you looking for long term growth, or were you following a momentum trend that was to have known limits. Sell stocks that have reached short term goals in place of selling stocks that still have good long term potential.
In assembling a basket of stocks, be careful not to mix stocks from different parts of the business cycle. Although it may give the overall account more stability, it tends to confuse the picture when AIM calls for a decision. For instance don't mix capital equipment stocks with their customer's stocks. The cap. equip. companies lag their customers in the business cycle. In this case, the customer's stocks might be going up and the cap. equip. cos. aren't. You might look at this picture and want to sell the cap. equips. because they are not 'performing'. The error would be that maybe the customer's stocks had already peaked and the cap equip guys had just started their run.
So, if you have a real mixed bag of stocks that you are AIMing, it's a harder decision than if you have separate AIM accounts for industry groups (or individual stocks). The more of a mixed bag it is, the more I tend to sell what's up and hold the remainder. This assumes that I'm still satisfied with the fundamentals of the remainder. (if I'm not, I'd do a non-AIM sale of the stock and pick up an equal value of an issue that is better suited to AIM and has better fundamentals)
My own experience with a group of stocks (about 10) was that after a couple of years of AIMing, the portfolio had 'concentrated' into about 4 stocks. These tended to be very good AIM stocks on their own. Also, I now had fairly large positions in these from concentrating the total value into fewer and fewer issues. It was at that point that I divided the portfolio into separate AIM accounts for each issue. They each went on their own way after that.
One last thought about IRA's. It's impossible to gain any benefit from a LOSS in an IRA. There's no taxable gains, so there's no offset. This is what led me to use a mutual fund for my IRA, as it's harder to actually loose money with mutuals. With individual stocks there's a much higher probability that I'd make an error in selection.

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