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A while back I looked at a way to smooth out PEG returns (68125). A few folks pointed out that because the number of stocks held varied with this system, it becomes difficult to manage the cash fund associated with it. They correctly pointed out that it is difficult to know how much cash to keep on hand for purchases, and that if a number of stocks are sold at the same time, you may find yourself holding more in cash than you would wish. On the other hand, if the screen tells you to buy a number of stocks at the same time, you may not be holding enough in cash to get into all of the stocks.

Another thing that has been bothering me about the system is that it is not allowed to compound. Profits sit in cash or they can be siphoned off.

The most effective way to address these problems that I have found is to allow the Initial Position Size to fluctuate as a function of the Total Portfolio Size. It appears that a ratio of 1 to 15 is just about right. Here's how this would work:

1. Your initial fund should be 15 times the original Initial Position Size. In the spreadsheet I will post I use $75,000 to fund an original Initial Position Size of $5000.

2. The Initial Position Size for buys in any subsequent week is the total current value of the portfolio divided by 15.

3. Use margin to absorb cash shortages.

That's it.

Margin was used a total of 15 weeks out of the 76 tested. Three of those weeks were isolated one-week durations of .2%, 2.3%, and .3%. Another time margin was used for a three-week duration and reached 17.4% of the total portfolio value (caution: daily data not checked). There was one other dip into margin. It lasted 9 weeks and reached 23.4% of total portfolio value. I have to confess that I would not be comfortable with that level of margin. I suspect that I would have sold one of my positions a week early to keep the margin under 20%. Take a look at 5/21/99 on the spreadsheet, and I think that you will readily guess which stock I would have sold early.

Concerning the issue of holding more in cash than you want to, it was very rare to hold more than 10% of the total portfolio value in cash for more than 3 or 4 weeks.

That's the best that I have been able to come up with. I'm looking forward to your comments, especially those of you who mentioned that you have tried similar things in the past.


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