Rescue My IRA: 2017 Annual Recap

Recently there was a comment on the blog asking if I was still following the covered call strategy in Rescue My IRA.  Although the quantity of posts has fallen off, the RMI strategy is still in place – it may be time to dust off the trading plan, however. 

In any case, it is time to write up a short summary of how the account's 2017 results.  This year was a busy one for me:  in May, I finally opened the brewery I’ve been planning since about 2013.  I drew a portion of the investment from this IRA, against the advice of my accountant and just about everyone else, but those funds helped us with the launch and that is a passion project that will go for the next 10 or more years (and just maybe someday will make some money!), so I'm comfortable with the decision.

As in recent years, this year’s final report on Rescue My IRA results will summarize key highlights without spending too much time on monthly commentary.  So here goes:

BLUF, or Bottom Line Up Front:

• The account opened in January 2017 with a balance of $183,945.12; after a withdrawal in March (investment in the brewery), the balance was $143,768.93, and the December 2017 ending balance was $151,486.03.
• Using the March value as the basis of gain/loss calculations, the dollar gain for the year, calculated on a March to December basis, was $7,717.07, or 5.37%. 
• The account underperformed the benchmarks I use for comparisons - the S&P500 gain was 21.83%. 

Long-term Performance:

In dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $151,486.03, a gain of around $24K, which excludes the $45K withdrawal during 2017.  The account has earned a positive return every year except 2015, as summarized below: 

• 2012: 4.11%
• 2013: 16.31%
• 2014: 8.50%
• 2015: 0.00%
• 2016: 9.75%
• 2017: 5.37%

The account's average annual return for these five years is 7.34% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA.  In past years I used the calculator at http://www.moneychimp.com/features/market_cagr.htm to calculate a comparable return, that suggests I could have earned 13.75% on average from 2012-2017.

Analysis:

As far as explaining why the Rescue My IRA returns fall short of these benchmarks, there is one essential reason – 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 than computerized trading. 

At the end of 2016, I was carrying a large amount of cash reserves in the account, more than 40% of the account value, in anticipation of the impact of the changing US presidential administration.  I held this large portion of the account balance out of the market through March, when I made the investment in the brewery.  So there was an impact from the opportunity cost of this decision, reducing the overall return in the account; since March the cash returns have been maintained at a 10% average rate.

For now, I continue to use the strategy of focusing on S&P 500 Index stocks, typically selecting from shares that are rated 4- or 5-stars on the S&P system, and seeking companies that pay dividends in the range of from 3% to 5% annually.  This approach may limit how many home runs I get, but it provides monthly cash flow and reduces risk somewhat.

As in past years, I’m satisfied with the results in this account, and I have a good feeling about what I’m accomplishing by being in control of the investment choices and approach.  That remains one of my primary goals for this account. 

Resolutions for 2018:

During 2017, I had a lot going on while we were getting the brewery started, and it still requires about 20 hours of work a week besides my day job.  These demands meant I stopped using cash secured puts as frequently as I did in 2016, although from time to time I was able to put together a short-term high % return using that strategy, typically using either SPY ETF or FB shares.  The work load will continue in 2018, so I expect status quo on this strategy going forward.

Looking back at last year’s report, I was bearish and expected a correction to occur, correlated with the new US administration.  That never occurred, and the market continued rising – because of my cash reserve strategy I missed out on some of those gains.  It’s my sense that even more than last year we face the prospect of a market correction, so I am going to begin to take steps to manage that risk by increasing cash.

Concluding this section, there was one final idea I closed with last year – 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 had set a resolution, not achieved, to begin a transition to this strategy in 2017.

I guess I enjoy picking shares for the covered call strategy too much to move over to the ETF approach.  I’ve got a great position running on FB, for example, that has earned more than 30% in 20 months, and I don’t think that is possible with ETFs.  So there is an implicit entertainment value to Rescue My IRA besides the explicit returns. 

In conclusion:

I still believe that the stock market will grow in the long-term, although we face the increased risk of headwinds in 2018.  Compounding this is the idea that many of the economic policies of the Trump administration and lackey GOP Congress are designed to benefit the extremely wealthy, not middle class small-time investors like me.  It’s a year to be carefully wary, to put in place a solid risk management strategy, and that is my plan for 2018. 

 

I hope my readers – if there are any left – had a great 2017, and have their plans in place to build an excellent 2018.  Happy trading to all! 

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!

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.  

Analysis:

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! 

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!

Rescue My IRA: November 2016 Results

Well, somewhere around the middle of the month, I realized that I hadn’t written my monthly update for October 2016.  That’s the first time I’ve missed the monthly recap in five years on this blog.  The only pitiful excuse I can offer is that I was pretty fascinated by the last few weeks of the US election – fascinated then, and truly disappointed now, like millions of others – I don’t see how an embarrassment a day, as we have experienced over the last month, is going to “make America great again.”

America is already great, and I believe we’ll survive this election, despite the President-elect’s high school level understanding of the global economy and macro-economics in general.  My strategy going forward will simply be to hunker down in the near-term, and accept what is likely to be a lower than average return in Rescue My IRA, at least for the first year of the new administration.

It’s my sense that two factors will be setting up some market headwinds as 2016 ends: first, the market has to come to terms with the American election, and during November we saw that there appears to have been a relatively positive response.  More on my results in Rescue My IRA shortly.

We also have to consider that we’ve been on a long-running recovery, essentially throughout the 8-year timeline of the current administration.  There will be many who disagree with me on this characterization, but those folks will disagree with me on a whole lot more than that, and so be it.  If we simply step back from our disagreements and consider the probability of an economic slowdown, or even recession, after nearly eight years of growth, we need to take a sober assessment of the situation – and my conclusion is that we are due for cyclical consolidation now, and we would have been, however the election turned out.

So, I’m turning my thoughts to preparing for that situation by taking money off of the table.  During November I started to take money off of the table and build cash reserves so that I could watch and wait to see what will happen, and as I write this in early December, I currently have $62,500 in reserves.  To show the growth of cash reserves, in September, I had $34,100 or so in reserves, representing just about 17% of the account; that increased to $40,100, or 22.5% in October, and $53,200, or 30% by November.

My goal will be to get this amount to around 50% of the account value and hold it there until I can get a good sense of how things are going to go.  If the markets are positive during this time, Rescue My IRA will underperform, but if my hunch is correct, my account value will hold a little more of its value than the market overall.

That said, here is a summary of result highlights for October:

·        Total Account Value, 10/31/2016:  $177,497.69, slightly down from the September close of $178,312.12

·        Total Cash Reserve, 10/31/2016:  $53,161.61, or about 29.95%

·        S&P 500 Index 2016 year to date performance as of 10/31/2016: 4.0%

·        SPY ETF year to date performance as of 10/31/2016:  5.9% 

·        Rescue My IRA year to date performance as of 10/31/2016: 5.9%

Here is the benchmark data for the account during November:     

Account Status:

·        Total Account Value, 11/30/2016:  $180,605.81, up from the October close of $177,497.69

·        Total Cash Reserve, 11/30/2016:  $53,165.61, or about 30%

·        Core Stock Positions (as of 11/30/2016):  AAPL (100 shares), ABBV (100 shares), DIS (100 shares), FB (100 shares), GE (200 shares), GM (200 shares), IP (200 shares), JNPR (300 shares), MAS (300 shares), MDLZ (200 shares), MS (200 shares), SPY (100 shares), T (200 shares), TXT (200 shares), XRX (500 shares)

·        Cash Secured Put (CSP) positions (as of 11/30/2016):  None

Performance Metrics:

·        Option Premiums Collected (net, month of Nov):  -$533.01 (-0.33%)

·        Capital Gains Collected (net, month of Nov):  $1,975.69 (1.18%)

·        Dividends Collected (recognized on the ex-date): $179.60 (0.11%)

·        Estimated Interest on Cash Reserve: $0.20

·        Total, Absolute Return:  $1,602.38 (0.96 % absolute return, estimated annualized return 11.52%) 

·        S&P 500 Index 2016 year to date performance as of 11/30/2016: 7.58%

·        SPY ETF year to date performance as of 11/30/2016:  8.10% 

·        Rescue My IRA year to date performance as of 11/30/2016: 7.75%

Next Month To-dos:
During December, there are six positions that will go ex-dividend for the month, yielding an estimated $377.75 in dividends.  If all of these dividends are collected, the expected yield is 0.23% for the month. 

Currently, many of the covered call positions have evolved into month-to-month situations.  In fact, at the start of December, a total of eight contracts had forecast expiration dates during the month.  At the time of this writing, the first weekend of the month, five positions are still in play.  Four are in the money, and one is out of the money, but the forecast gains from these stocks are $436.78 or 0.26% yield. 

With about half of my monthly goal of 1.00% return forecast from these activities, covered call premiums will need to make up the balance.  We’ll see how that turns out in light of my updated cash reserve strategy – it will certainly be a stretch.  The flip side of that risk, however, is capital preservation…I hope so, at least!

That’s it for the November update – as always, the results are reported net of commissions and fees.  I certainly hope that the markets will perform before than my prognostication.  In any case, until next month, happy trading!

Thoughts on Cash Secured Puts, Part 2

Last week in this post I wrote about the strategy of using Cash Secured Puts (CSPs) in Rescue My IRA to augment the five-year track record I have in that account with covered calls.  The post referred to the Options Industry Council (OIC) web page, summarizing the information there into an overview of CSPs:

…the risk profile of a CSP trade, while significant (as with any option strategy), is essentially equal to the risk of a covered call trade.  Both trades are focused on the prospect of owning the underlying security, which has market and equity value, rather than trading on the value of the financial instrument represented by the option.  

 

My plan for this second and final post in this introductory series about CSPs is to document what I’ve learned about these options so far, since I began trading them in June 2016.  So far, I’ve sold these options against eight underlying securities:  MOS, VLO, CMI, IP, SKX, FLR, TGT, and SPY.  For the record, my experience with MOS and VLO have already resulted in a refinement of the strategy:  never sell a CSP on a stock or fund that you don’t care to own!

My approach so far has been slightly contrary to the concept outlined on the OIC page.  Instead of using the CSP to discount the eventual price of owning shares, I’ve sought to avoid assignment and to collect premiums for a net gain, essentially trading the CSP as a security in its own right.  This means combining sell-to-open (STO) and buy-to-close (BTC) trades following the old stock market maxim of buying low and selling high, except in reverse.

Still, I’ve had my VLO and TGT trades result in assignment.  These price of these stocks dropped quickly in the days just before my CSPs expired, leaving my options in-the-money, so the shares were assigned.  Although I was able to quickly close those positions at a gain, it reminded me that I still have to do my due diligence research on these trades, and I have since then.

For future CSP assignments, my plan is to simply convert the trade into a covered call situation, writing new options against the same strike price.  In these cases, the CSP premium can be considered a discount, so being called away at the original strike will actually result in a stock gain in these trades.  The takeaway for me is that this is exactly what the OIC described.

Since August, most of my CSP trades used the exchange traded fund SPY as the underlying security, and I’ve evolved to using weeklies in the process.  The contracts were never assigned.  Here is the September record of the SPY trades:

• Three weekly CSPs at strikes between $212.50 and $216.00
• Net option premiums (includes STO/BTC trades and commissions and fees):  $274.00
• Absolute return against highest strike price:  1.26%
• Annualized return based on 21 days invested:  21.98%

Thus, at least for the month of September, I was able to achieve the investment goal that Rescue My IRA uses as a guideline:  seek an annualized return of 12%.  Some of my colleagues on the Yahoo Just Covered Calls board write about their goal of 24% annualized.  That goal seems feasible to me, although achieving it probably will require more research and experience than I have so far.

My way forward is to continue with these trades and build on my experience of 12 or so trades to date.  I do use the portfolio concept of holding 12 to 16 positions as a way to mitigate the risk of trades going extremely south, and it’s inevitable that I will take some hits, but my sense of it is that by combining the due diligence approach I use with covered calls and limiting my picks to stocks I wouldn’t mind owning otherwise will make that risk manageable.

When I have cash sitting in reserve, that capital's return is negligible.  So these CSPs should lead to an improvement in that situation, and improve the annual results for Rescue My IRA in the process.