Thursday, February 2, 2017

Rescue My IRA: January 2017 Results

Here we are two weeks into the Trump administration, and even though we’ve seen a little rally since November, I believe the market is facing headwinds from two factors. As I’ve continued to write since last fall, I believe that we’re in for a cyclical consolidation and possible recession this year, which is why I’ve increased my cash reserves in Rescue My IRA.

The first factor is the inevitable return to the mean after the 8-year recovery that followed the Great Recession of 2007.  The second is the impact from Trump’s plans for the American economy/GDP, based on what we already know: a reduction in consumption due to increased healthcare costs for the general public, and limited wages increases; a reduction in the rate of growth of the government contribution to the economy; and increasing interest rates due to increased federal deficit spending (that's what happens when expenditures are roughly the same but revenues are reduced due to tax cuts) - the net effect will be to crowd out or defer private sector investment. 

The near-term downside of the Rescue My IRA cash reserve strategy is that there is less money working for me in the market.  This month that fact explains why the S&P 500 and SPY benchmarks exceeded the RMI return – 1.79% vs. 0.62%, respectively.  As I wrote last month, for the early months of 2017, due to the large cash reserve I am holding, I expect that the account will lag the benchmarks, no matter whether the market is up or down. 

That said, here is the benchmark data for the account during January:     

Account Status:
·        Total Account Value, 1/31/2017: 185,945.12, up from the December close of $183,945.32
·        Total Cash Reserve, 1/31/2017:  $65,605.08, or about 35%
·        Core Stock Positions (as of 1/31/2017):  AAPL (100 shares), CMCSA (100 shares), 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), WRK (100 shares), XLV (100 shares)
·        Cash Secured Put (CSP) positions (as of 1/31/2017):  FB 125 3 Feb 2017

Performance Metrics:
·        Option Premiums Collected (net, month of Jan):  $617.94 (0.34%)
·        Capital Gains Collected (net, month of Jan):  -$545.65 (-0.30%)
·        Dividends Collected (recognized on the ex-date): $30.00 (0.02%)
·        Estimated Interest on Cash Reserve: $0.20
·        Total, Absolute Return:  $102.49 (0.06% absolute return, estimated annualized return 0.67%) 
·        S&P 500 Index 2017 year to date performance as of 1/31/2017: 1.79%
·        SPY ETF year to date performance as of 1/31/2017:  1.79% 
·        Rescue My IRA year to date performance as of 1/31/2017: 0.62%

Next Month To-dos: 
In keeping with past practice, during 2017, whenever a return 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 February, there are six positions that will go ex-dividend, yielding an estimated $439.50 in dividends, or about 0.24% of the account’s January 1 value.  There are two February in-the-money positions and the rest are in back months.  For sensitivity analysis, if the two Feb ITM positions, IP and MOS are called away, the dividend take reduces by $147.50, and the overall yield is reduced to 0.16%. 

At the start of the month, there were eight positions with expirations in February.  Two of those have already been rolled out at the time of this writing, and I unwound a third position for a loss on February 1.  At this time Rescue My IRA has February in-the-money positions in CMCSA, FB, MDLZ, MOS, and IP, and a February out-of-the-money position on XLV.  The unwound position was QCOM, which was a loss; at this time the net of stock gains forecast is -$379.85, or 0.21% of the January 1 value.     

For now, these estimates add up to a return of about 0.19%, or 2.22% annualized.  At the end of the month, that is sure to change, because there will be a decent amount of options activity due to all the position exits.  I will keep about 65% of the account value in stocks – that is a moderate outlook for me, not quite bearish, but certainly aware of and managing potential risks in the market.      

That is the January update.  Until next month, happy trading!

Monday, January 2, 2017

Rescue My IRA: 2016 Retrospective

This year’s final report on Rescue My IRA results will closely follow the 2015 format – it summarized the key highlights without spending too much time on the monthly commentary.  So here goes:

BLUF, or Bottom Line Up Front:
  • From January through December 2016, Rescue My IRA rose from a balance of $159,592.67 to $183,945.12.  January was tough, as that result was down from the December 2015 balance of 167,609.77, which I use as the basis of year-to-year comparisons.  
  • The dollar gain for the year, calculated on a December to December basis, was $16,335.35, or 9.75%.  This result is right on the benchmarks used for the account – the S&P 500 gain was 9.54%, and the SPY ETF gain was 9.64%. 

Long-term Performance:

In dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $183,945.12 at the end of 2016, a gain of more than $68K.  Besides the S&P 500 and SPY ETF results I mentioned above, a third benchmark I use is a goal of a 12% annualized return. Here’s a summary of the results, by year:
  • 2012: 4.11%
  • 2013: 16.31%
  • 2014: 8.50%
  • 2015: 0.00%
  • 2016: 9.75%

The average annual return for these five years is 7.73% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA – and it basically matches the long-term average return on the S&P 500.  Last year I found the calculator at http://www.moneychimp.com/features/market_cagr.htm, which suggests I could have done closer to 16% over this time frame, 2012-2016.  


There are a few possible reasons that explain why Rescue My IRA falls short of the benchmarks on annual basis.  Most importantly is my status as a small time retail investor – which means I pay fairly high fees on average, and my trades are all manually entered, a process that is less efficient to computerized trading. 

Although it didn’t hurt the results as much in 2016, I have steadily increased the amount of cash reserves in Rescue My IRA.  At year end the account was nearly 41% in cash, which is a risk management philosophy I will pursue for the near term, as I expect the market to turn south during 2017.  This approach has the potential for reducing returns during 2017 if I am wrong and the market continues an upward trajectory. 

I’ve continued using the strategy of focusing on S&P 500 stocks, and specifically choosing shares that are rated 4- or 5-stars and paying dividends in the range of from 3% to 5% annually.  This approach may limit how many home runs I get, but it does reduce my risks as well.

I’m happy with the results and I have a good feeling about what I’m accomplishing by being in control of the investment choices and approach in Rescue My IRA – and that is one of my primary goals for this account. 

Resolutions for 2017:

During 2016, I finally found a way to put the cash reserves to work by selling cash secured puts on the SPY ETF.  The results were decent and certainly contributed to matching the market.  For now, however, at least for the first half of 2017, I will not use this strategy, as I believe we are in for a correction and I would likely get assigned the puts.  I’ll just keep the money in cash for now – although I may look at some preferred stocks as an alternative.

I had thought about retooling the Rescue My IRA trading plan last year, but never did it.  Now that I have some practice with the Cash Secured Puts approach, it seems like I need to incorporate it in the write-up. 

One final idea – while I appreciate the risk mitigation that portfolio diversity offers, and that is why Rescue My IRA will usually have between 12 and 16 active positions at any given time, I could go for a simplified approach that uses S&P 500 ETFs, like SPY, as a surrogate for the actual shares.  I hope be able to spend some time working on a strategy for doing this during 2017 – we’ll see. 

In conclusion:

As we look at the brave new world of 2017, there are things I hope I am wrong about, namely my concerns about a near-term market downturn or recession; but I also believe in the long-term growth of the stock market, so that there is the possibility of a positive year overall.  I’m simply going to put a larger cash reserve in place and wait it out. 

I hope my readers had a great 2016, and are looking forward to an excellent 2017.  Happy trading to all!