A test of the AIM for Dogs strategy

Well, I did it. I went back and did a test from the Dogs from '96. Basically, I started with a $20,000 account, put half of it into 5 stocks - GE, DD, MMM, IP, and EK. I only did quarterly updates, as monthly would have caused excessive brain damage and taken me another week or two of working constantly. The first run, I did it by the rules I set up. It did OK, but I found at the end of this year I had never got over 60% of cash in the account when the market was high and I would have had sell signals. Amazingly, I never avoided a sale, and wound up still holding an excessive amount of cash, assuming we are now at the bottom of the market (which I hope we are - I don't have much left in my real account to invest if we go much lower. I guess that's what happens when you start this when the market is going down!)

So, I went back and did it using a 50% model and it ended up coming out much better. We have to keep in mind, however, that the start of this test was in the middle of one of the biggest bull markets we've had. I still think using 50% cash as the rule to not make a scheduled sale will work, as long as we also put the buy Safe to 10% if the cash balance falls below 50% when things are in the bottom of the market. I know this sounds weird, but I found that the percentage is always lower when the market is high, and always higher when the market is low. The 50% percent point always indicates an extreme in market conditions. In the test, I never put the Buy Safe to 10% until the last entry I had, which was at the end of this last year. The good thing is, I still had over $10,000 to invest, should the market continue to go lower. In the case of my real account, I wouldn't expect the no-sell rule to kick in unless we have an amazing up-move.

The number came out as follows:
The high for the total account value (stock + cash) was $37,054 in Oct., 2007. $19,548 in stock and $17,505 in cash. I added $1,000 in dividend income to the cash every 10 quarters, which would seem conservative, considering my real account, which is now at $3,500 in stock yields about $50 a quarter. I did not figure any income that the cash account would produce, but if it is kept in any kind of liquid income-producing fund, such as a bond or treasury fund, should produce at least an additional 4% a year. That figure would go up, of course, depending on what kind of fund is found for the cash you aren't putting into the stock and what it's yield is. The final tally at the end of this last year was $28,381 total. $18,008 in stock and $10,373 in cash.

Not bad, considering most people lost over 50% of there savings in the post-2000 fall and in many cases up to 75% this last year. You also need to realize we are now poised to ride a bull market that will inevitably come, being heavily invested in stock at this time.