Rescue My IRA: December 2016 Results

Last month during my catch-up post for October and November, I posted a strategy that I had begun to put in place for Rescue My IRA as we look forward to what 2017 holds.  I’ll start this month with a brief recap of those ideas, since I’m continuing to execute trades based on those assumptions.

Looking forward to 2017, I believe that the market faces headwinds from two factors:  first, the market has to come to terms with the American election; and second, we have to remember that we’ve been on an 8-year recovery since the end of the so-called Great Recession of 2007.  Even though the market appears to have responded positively to the election, it seems to me that we are due for a cyclical consolidation now, and that would have likely happened no matter how the election turned out.     

My focus for now, until we see how these variables play out, is to take money off of the table and hold it as cash reserves.  I started in August with about $34,100 in cash, and as of December 30, I had increased that amount to $72,000 – about 41% of the account value.  I will continue to work on getting this amount to 50% of the account value while simultaneously maintaining the other risk management strategy I have, keeping a portfolio of between 12 and 16 positions in play. 

The near-term downside of this strategy is that there is less money working for me in the market, so it is reasonable to expect that monthly results will fall short of the S&P 500 and SPY benchmarks I use to track performance.  That didn’t happen in December, thanks in large part to a tax-free spin-off from XRX (I counted the new shares as a dividend for tracking purposes) – and Rescue My IRA ended up slightly ahead of the market.  However, in the early months of 2017, I expect that the account will lag the benchmarks, no matter whether the market is up or down. 

I’m planning to do a 2016 annual recap next week, but meanwhile, here is the benchmark data for the account during December:     

Account Status:

·        Total Account Value, 12/30/2016:  $183,945.32, up from the November close of $180,605.81

·        Total Cash Reserve, 12/30/2016:  $72,046.12, or about 41%

·        Core Stock Positions (as of 12/30/2016):  AAPL (100 shares), ABBV (100 shares), CMCSA (100 shares), CNDTw (100 shares – this is the tax-free spin-off from XRX), CTL (300 shares), DIS (100 shares), FB (100 shares), GE (200 shares), GM (200 shares), IP (200 shares), KO (200 shares), MAS (300 shares), MDLZ (200 shares), MOS (200 shares), XRX (500 shares)

·        Cash Secured Put (CSP) positions (as of 12/30/2016):  None

Performance Metrics:

·        Option Premiums Collected (net, month of Dec):  -$624.02 (-0.37%)

·        Capital Gains Collected (net, month of Dec):  $848.87 (0.51%)

·        Dividends Collected (recognized on the ex-date): $1,796.25 (1.07%) – includes tax-free spin-off from XRX

·        Estimated Interest on Cash Reserve: $0.62

·        Total, Absolute Return:  $2,021.72 (1.21 % absolute return, estimated annualized return 14.47%) 

·        S&P 500 Index 2016 year to date performance as of 12/30/2016: 9.54%

·        SPY ETF year to date performance as of 12/30/2016:  9.64% 

·        Rescue My IRA year to date performance as of 12/30/2016: 9.75%

Next Month To-dos: 

In keeping with past practice, during 2017, whenever a percentage is shown in the monthly forecast, it is calculated using the December 31, 2016 account valuation.  Also, the forecast and actual returns are always calculated on a “net of commissions and fees” basis, since these are costs that lower the amounts I receive. 

For January, there are two positions that will go ex-dividend, ABBV and MAS, yielding an estimated $94.00 in dividends.  At the time of this writing, ABBV has an in-the-money January call written against it, so it is probable that the stock will be called away, reducing the dividend haul to $30.00 from MAS.  The expected yield from dividends is either 0.05% or 0.02% for the month – the balance of returns will need to come out of stock gains or premiums. 

The account’s continuing situation is that many of the covered call positions in Rescue My IRA are month-to-month contracts.  In January, seven positions face expiration dates:  ABBV, CMCSA, CTL, FB, GE, IP, and MOS.  Only four are in-the-money as I write this summary, but if all seven are called away, the account will recognize revenue of $759.02 from stock gains.   

For now, these estimates add up to about half of my goal for the month, which is a net return of about 1%.  Given the cash reserve strategy in place, I expect some challenges – but I’m up for it, and I’m looking forward to seeing what the market holds.  My outlook is not quite bearish, but certainly aware of some potential risks in the market, so I don’t expect much for the first few months of the year.    

That is the December update.  I’ll post a 2016 wrap up later this week.  Until next month, happy trading!