Follow-up to 2014 Results

There was a great follow-up question yesterday about the Rescue My IRA annual results I posted – a colleague wanted to know a few more details about the returns.  Although I answered the question directly, I’ve decided to post a follow-up here with additional information.

I report the totals for dividends, capital gains, and covered call premiums on a monthly basis in a wrap-up post, but I hadn't totaled them for the year - I haven't come to terms with how to use that as a metric to improve managing the account, since I feel that the statement value is the best gauge of progress. 

At my broker, that accounting goes like this - cash and stock values is positive, and covered call values negative.  I simply use the starting value and the ending value as the way to calculate growth.  If any readers have thoughts on how to reconcile the two, I'd love to hear them.

That said, the following are the total itemized returns in the account: 

• Dividends:  $3,473
• Cap Gains: $15,166
• Premiums $3,200
• Total:  $21,838

That percentage is 14.13% - but the increase in account value was only 8.5%. I attribute this variance to the fact that since I won’t need the funds from Rescue My IRA for 7 to 10 years, everything is reinvested – and so market ups and downs don’t translate to equivalency of cash flows. 

As a second note, I will often unwind my transactions early when the delta reaches 1.00, which has the effect of offsetting premium revenue for capital gains on the shares. My justification is to take those profits as soon as possible and then get the funds reinvested.

That’s all for today, just a little additional information on how Rescue My IRA operates.

Rescue My IRA - 2014 Annual Results

The year just ended, 2014, is the third full year of my “Rescue My IRA” initiative, which employs a covered call strategy to both help recover from the poor results achieved by professionals from 2005-2007, when I entrusted my IRA to them.  Although the account was active for a few months during 2011, activities during that time were focused on consolidating the old 401(K)’s and writing the trading plan, so I consider January 2012 the official start date for reporting results.  Thus, January to December 2014 is the annual period I’ll be using for this year end post.

Bottom Line Up Front – or “BLUF,” as we like to say at my office: Rescue My IRA started the year with a statement balance of $154,520.55, and ended the year at $168,107.47, for a net gain of $13,586.92, or 8.50%.  On the face of it, this return is much less than the 2014 gain achieved by the S&P 500 index (reported in various financial media as 14.04%); however, that is probably not an apples-to-apples comparison, as I’ll explain below.

In dollar terms, the account’s statement value has increased from $127,606.44 at the start of 2012, to $168,107.47 at the end of 2014, a gain of nearly $41K.  Besides the S&P 500 results, a second 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%

The average annual return for these three years is 9.64% - that’s not bad, but it is short of the 12% goal I’ve set for Rescue My IRA. However, it is very close to the average S&P compound average growth rate for the 1970-2012 period, as outlined in this Wikipedia article:  10.40%.    

It would be useful to consider some of the differences between my approach and an approach that is based on a straight indexing method, so let’s take a moment to consider the differences in approaches.

• First, I am a “small time, retail investor” – as such, my fees are fairly high, and I don’t spend all of my time managing the Rescue My IRA account at Scottrade, although I do find time to check in on it every day. 
• Second, my sense of market risk for much of 2014 suggested that I keep a larger cash reserve than I had in the past, so I kept the average reserve level at about 30% of the account value throughout the year.  Adjusting the S&P’s 14.04% return by 30% yields a return of around 10%, so my results aren’t that far off.
• Finally, I don’t use the entire S&P 500 universe of stocks – to limit some of the risk in such a stock market intensive approach I generally focus on the shares that are rated 4- or 5-stars, outsourcing some of my due diligence on stock research in this manner.  With few exceptions, I also look for dividend payers in the range of from 2% to 5% annually, further limiting which shares I will use in Rescue My IRA.  The effect is to limit “home runs” somewhat, but it also reduces the downside risk of a major loser.

All of that said, I don’t have anything to complain about with these results.  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. 

That’s about the extent of the annual wrap-up for 2014, if I were keeping it brief.  However, there are resolutions that are due for 2015, so I’ll take a moment to post them here. 

• First, I’d like to find a way to put those cash reserves to work for me while they are not invested in stocks.  I looked into bond ladders during 2014, it is possible I could invest 20% of the account value in them and get some interest back that way.  That's a multi-month prospect, so as an alternative I may just find an interest paying ETF for this purpose…it wouldn’t take much to beat what Scottrade (as much as I love them!) pays on the cash balances I’ve kept this year!
• Second, I’m going to work on retooling the Rescue My IRA trading plan, which I wrote back in 2011.  With three years’ worth of experience with the covered call approach, there are probably some insights I can apply to improve my results by a few percentage points, but there won’t be major changes. 

That’s it for the 2014 wrap-up.  It’s onward and upward for Rescue My IRA, and I will continue to use the covered call approach for 2015.       

I hope my readers were successful in 2014 as well – and here’s to happy trading next year!