Saturday, July 25, 2015

Financial Planning Weekend Update - July 25, 2015

That looks pretty horrible doesn't it? After Monday's pop to 2128 the S&P has been all downhill mostly due to pretty lackluster earnings. Well, at least none of my positions are deep in the money anymore - ED by $0.90 and VTR by just $0.39.

One bit of "good" news: the Federal Reserve accidentally released some normally classified projections that indicates they expect to raise rates by 0.25% only once this year. That should suck pretty much all the rate hike fear out of the market for the remaining 5 months of 2015. But there's plenty of other scary stuff out there...

This week presents a very useful learning opportunity. Back on April 18 I let virtually all my positions expire in the money. I then restructured the portfolio but in doing so I re-bought KO, GE. PG, and COP at higher prices. What would have happened if I had "bought to close" those 4 positions?

To estimate the "Cost to Close" I added 3 cents to the amount the contract was in the money (a pretty typical amount by 3:30 or so on expiration). For example, in the case of KO that was ($0.30 + $0.03) * 700 = $231.00. The rest of the columns are self explanatory. It turns out that I would be $1267.00 better off if I had bought back those options. Those 4 positions represent a little more than half my current unrealized loss.

The Lesson:

Think twice (at least) before letting a position be called away. You've seen that in action the last couple months - hopefully I've internalized it and I won't make the same mistake again.

Monday, July 20, 2015

Financial Planning: Options Monday - July 20, 2015

This was quite a month! The markets as a whole are trading near all time highs but with the threat of interest rate increases looming in September many of the rate sensitive stocks in my retirement portfolio are well below their original purchase prices. This isn't really a a big deal for two simple reasons:
  • The Dividends Keep Coming In
  • Covered Calls Add Consistent Income Each Month
This month is a a good example. Even though August is a "low dividend" month with only $655 coming in, I was still able to collect $3194 in options premium through Friday's roll outs on KO, PG and ED and this morning's sales on the remaining positions. You can see the difference in monthly income is entirely due to the fact that only PG and ED pay in the Feb/May/Aug/Nov cycle.

As I mentioned Friday, I decided to let MO be assigned because there were no profitable calls to roll out/up to. This morning I took that $30,000 and bought 400 shares of Ventas (VTR) and large healthcare REIT focused principally senior living/assisted care facilities. Later this year Ventas will be spinning off its skilled nursing facilities into a new company. This will give me the opportunity to work through a plan to handle such transaction in my "retirement portfolio" without risking any real money. When the spin off happens I'll split the portfolio into "keep" and "sell" branches and monitor them in parallel.

As you can see from the summary, my cash position is now over $25,000 and I expect to hit the $40,000 mark in October with the sale of November calls. At that time monthly income will be cycled into new purchases to keep the portfolio more or less dollar value balanced. And yes, that means more F.

Saturday, July 18, 2015

Financial Planning Weekend Update - July 18, 2015

Expiration weekend and another month in the books! The markets as a whole had a pretty good week, moving to the top of the current trading range as the Greek business resolved, China's markets stabilized and the VIX fell to "calm" levels. On the other hand most of my positions are "under water" but since this portfolio is invested for income from dividends and covered calls, that really doesn't matter much.

July Roll Outs
On Friday afternoon I rolled out three of "in the money" positions at the same strikes as July. The only oddity was the PG position that I rolled to August 28 because the weekly $1 strike increments for the 21st won't appear until Monday. Net profit: $782.60. The remaining six positions will be established on Monday as usual.

MO was now so deeply in the money that there was no reasonably profitable strike in August. So I decided to let it be assigned. That's not as bad as it looks. Each share had returned $1.04 in dividends (March and June) and $0.78 + $0.87 + $0.79 ($1.04 - $0.25 when I rolled in May) + $0.65 for a total of $4.13 less the $1.51 I lost on cost basis that's $2.62 or about 5% profit in 4 months.

So what will I do with the $30,000.00? On Monday I'll buy 400 shares of Ventas (VTR) a healthcare REIT with a dividend yield of 4.91% and a beta of just .38. There will be a couple thousand left over that will go into the cash pile.

Thursday, July 16, 2015

Six Ways to Tell You Need a New Financial Advisor

The US Treasury
Your adviser says you should "own your age in bonds"

This is one of the most common allocation rules from the "old school". It suggests that if you're, say, 65 years old your portfolio should be 65% bonds and 35% stock.

Why it's bogus:

With real bond returns at 0.82% this is a good way to become a cat food connoisseur.

To be fair, bonds can produce solid returns during major market sell-offs so they certainly have a place in your portfolio. But 65%? No where near. People like Jeremy Siegel (the kind who actually understand the numbers) demonstrate nearly the exact opposite is true. In chapter 6 of Stocks For The Long Run Siegel analyses portfolio risk for a number of holding periods. The results show that for 20 to 30 year periods (a reasonable time frame for retirement) the lowest portfolio risk comes with 58% to 68% invested in stocks.

Your Adviser Asks if You're Worried About XXX
(where XXX is some vaguely defined "big event")

It's a sales pitch based on fear: "social security is going broke" (it's not), "inflation will accelerate" (it hasn't yet in spite of almost 7 years of near zero short term rates). The dollar will collapse because (inflation, China, deficit, debt, etc...). It won't. The market will crash (it might, and then it will advance to new highs in a few years).

This one pops up in those free seminars has-been actors and right wing commentators tout on late night TV. The individual giving the seminar is promising a way to "survive" some event or events with your finances intact. He's really there to sell suckers his DVDs and books by scaring them with a bunch of hand waving and unverifiable claims and how something must happen (and soon). If he gets lucky he'll also sell a few financial products from which he earns high commissions.

Why It's Bogus

There are no secrets in the financial world. Everything that's in those expensive DVDs and books is available free on the internet or from your bank or broker. When you hear phrases like "your income goes up with the market" that's all you need to know. You're being sold an Equity Indexed Annuity. It's one of the best products in the world - for the salesman. You? Not so much. See below for more on annuities.

Not My House
Your Adviser Suggests a Reverse Mortgage

You've seen these advertised on TV, probably in the same commercial break as the "free seminar". They promise guaranteed income as long as you live in your home and meet other requirements.

Why It's Bogus

See that phrase "as long you live in your home and meet other requirements"? That's the key. And there are lots of ways an elderly person can run afoul of that gotcha:
  • Miss a property tax payment? Oops, you didn't meet the requirements.
  • Let the insurance lapse by accident? Oops, you didn't meet the requirements.
  • Can't keep the weeds under control? What about that busted gutter?  Oops, you didn't meet the requirements.
  • Spend 13 months in a nursing home while you rehab after you break your hip? Sorry, you didn't "live in your home". 
You better believe the lender is going to come for that house.

There's another trick married couples need to watch out for: putting only the older person on the paperwork. It's easy to fall for - the shorter life expectancy results in higher monthly payments. If the person on the paperwork dies first? Somebody's going to be looking for a place to live.

A reverse mortgage might be appropriate for a very old (say 85+) individual who owns her home outright and has enough income to cover the normal upkeep and insurance required by the HECM. Otherwise - forget it.

Bill "4%" Bengen's Allocation

Your Adviser Mentions the 4% Rule

Back in 1994 a smart guy named William Bengen, based on some very good research, suggested that by withdrawing about 4% of one's retirement fund annually could allow the fund to last longer than the owner. His paper is here.

Why it's bogus:

Bengen's study was based on the assumption of a return from bonds of 5.2% and from stocks of 10.3% (before inflation) in an evenly balanced portfolio.

Today real bond returns are at historic lows with the 10 year Treasury yielding 2.42% and inflation running about 1.6% last year. From 1994 through June of 2015 the S&P 500 has had an average annual return of 7.08%. That's real returns at roughly 0.82% and 5.48% respectively.  See the problem?

A very low risk free interest rate coupled with low income & capital appreciation from stocks pretty much dooms the 4% rule. Despite rumblings from the FOMC (we might raise short term rates from 0.01% to 0.25% sometime, when the data indicate it's needed, maybe...) and the squeals of the lunatic fringe about out of control inflation, rates are going to stay low for the foreseeable future.

For a fully worked out discussion this article from 2013 is the place to start. (Executive summary: You have a 57% chance of running out of money before you die if you use the 4% rule.)

Don't Buy These
Your Adviser Mentions Gold

This will  inevitable come with a pitch involving "inflation" (non-existent), "hard currency" (how are you going to exchange a hunk of gold for a bunch of turnips or a gallon of gas?), and so forth. All that nonsense will be seasoned with a generous helping of "worry" (see above with a double dose of China).

Why It's Bogus

Gold is illiquid. If you need to turn it into cash you're at the mercy of whatever the current spot price is minus sales commissions and other fees, especially if you're trying to convert the physical metal. And if everything does collapse... how are you going to trade a hunk of shiny (but useless) metal for that bunch of turnips?

Gold is not a hedge against inflation. At most gold prices increase at approximately the rate of inflation. Right now inflation is about 1.6% and gold is dropping in price. Here's an article from 2013 on what started to happen (and continues to this day) when fear fell out of the equation. In the meantime that so called "hard currency" is earning no interest and pays out no dividends.

If you want some pretty coins for your grand kids to play with, fine. Just don't expect gold to save your retirement.

I Should Have Bought Stocks

Your Adviser Suggests an Annuity

You've probably seen these advertised right after the reverse mortgage commercials and in much the same way: "guaranteed payments for life", "your payment can never go down", etc. If you have a good relationship with your insurance agent (as we do) he or she will almost certainly bring up annuities since they are typically originated by... insurance companies.

Why It's Bogus

OK, annuities are not necessarily completely bogus. But they are lifetime contracts that lock up your money while promising a steady payment. Some have the ability to increase the payments depending on market conditions (see below). But here's the big problem: annuity payouts are based on current interest rates. Remember why the 4% rule is bogus? An annuity ties up a big pile of money while providing a very low return - a return that's guaranteed to decline in purchasing power.

If you have a lot of cash going into retirement an annuity may be part of comprehensive retirement plan.  Immediate annuities (which consume dividends and principal) can provide a reasonable income stream if you have predictable needs and remember to adjust them for inflation. You can use the free calculator here to model the amounts you might need.

That's for simple immediate annuities. Unfortunately there are a bunch of more complex ones. The one you'll hear about most is technically called an Equity-Indexed Annuity. These are the ones that you'll see advertised on TV with claims like "your income goes up with the market" and "you'll never lose money". These are extremely complex products that are sold with high commissions and fees. That's bad enough but many allow the company selling the product to change the rules whenever they want to.  If you don't read and understand the fine print you'll be in a world of hurt.

For a complete discussion of EIAs, check out what the Financial Industry Regulatory Authority has to say.

So What Should You Do? 

Honestly? I don't really care. What I will do is explain what I've been doing in this blog and give you pointers to resources that will help you decide if you might want to do something similar.

Saturday, July 11, 2015

Financial Planning Weekend Update - July 11, 2015

That was a fairly horrifying week. But with all the excitement over Greece and China we're still in the long term trading range on the S&P.

Last week it looked like F was finally going to hold $15 but flopped back to the mid-14s. A couple positions are actually in the money. ED is in the money by $0.25 and MO by $1.31. We've got another week to go until expiration so who knows what will happen. As I did 2 months ago I'll buy back in the money calls.

GE will be announcing earnings on the 17th before the open (consensus EPS of $0.30 or $0.31 depending on who you believe) so that might have some effect on that position. The rest will report later in July or early August.

A big nothing week but at least another lesson in "don't commit everything at once". When I'm actually retired Beth will still be working so we won't need IRA income immediately. I'll have plenty of time to watch for entry points.

Last night the Greek Parliament approved Tsipras' deal with the EU so the  Greek business is off the table for a while. China seems to have settled down as well, so maybe we can get back to "real" data for a couple weeks as earnings come in.   

Friday, July 3, 2015

Financial Planning Weekend Update - July 3, 2015

That wasn't much fun. The spreadsheet looks horrible again, but of course I'm in this for income from dividends and option premium. As long as we're bouncing at the bottom of the S&P's range I'll be looking at expanding a couple positions in two weeks. 


US Markets drop 2% or so in the US on Grexit worries. Scary, but all that really happened is the S&P fell to the bottom of it's 3 month range.


S&P Futures indicated a modestly positive open of about 0.7%

EMR announced a September 30 spin off of its Network Power business as a separate company and that it will "explore other strategic actions". It was bid up as much as $1.75 pre-market.

This will be especially interesting because I'll have the opportunity to split my model into "keep 'em" and "sell 'em" versions. The implications for options will also be interesting. The transaction is expected to be complete by September 30. Assuming that is the closing date, if I write calls on my EMR position on September 21 (as I expect to) I'll have some decisions to make depending on whether the new companies either combined or separately still meet my portfolio requirements.

GE announced the sale of its European private equity business for $2.2 billion


Pretty good up-ish day as people realized the Greek business is probably going to get worked out.


Some fairly weak and worrisome job and economic numbers were released today since Friday's a holiday. The markets started up but drifted negative by mid-day. Not surprising; no one wants to get caught too long (or short) over a long weekend with the Greek business unresolved. 

GE runs into some anti-trust issues with selling it's appliance division to Electrolux. Seems the combined entity would have over 50% of the market appliance market. The Alstom deal in Europe is still tied up with regulators as well.


For us office types this is the Independence Day day off. Markets closed. Whew!