SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

3 Principles to a Successful Investment Experience


Although not an exhaustive list, what I’ll present in this article are three core principles that overwhelmingly stack the odds of a successful long-term investment experience in your favor. These three principles are asset allocation, diversification, and rebalancing.

I’ll explain all three in this article, along with examples. The best part is none of this is overly complicated and can largely be automated with recurring ACH transfers, systematic fund purchases, and rebalancing software. I recommend financial plan automation to the maximum extent possible, as this minimizes the chances we'll overthink our purchase decisions by trying to time the market.

 

Asset allocation

Asset allocation is your portfolio mixture of stocks, bonds, and cash. In order of lowest expected risk and return to highest is cash, bonds, and stocks. Your allocation to cash should be based on your short term liquidity needs. Keeping a month or two of living expenses in your checking account, and another three to six months in a high yield savings account or money market mutual fund should round out the majority of your cash position most of the time. Cash is also sensible for any lump sum expenses coming up in the next year (large tuition payment, car purchase, etc.). Expenses coming up in the next 2-5 years can be held in FDIC insured CD’s or bond funds of similar maturity as this appropriately reflects the time horizon of the money. I recommend only investment grade bond mutual funds or ETF’s.

 

Beyond 5 years, your decision to include fixed income in your portfolio (CD’s or bond funds) becomes more of a risk tolerance decision than a financial planning decision. It would be reasonable to consider keeping all dollars with an expected time horizon of greater than 5 years in diversified equity funds, but not everyone has the stomach for the associated volatility even when they know they don’t need the money for several years. For this reason I recommend using the following table to guide that decision, where your maximum tolerable loss helps determine your equity allocation, with the difference going into fixed income funds.

 

image.png 

Source: “Your Complete Guide to a Successful and Secure Retirement” by Larry Swedroe and Kevin Grogan.

 

Diversification

Diversification is your allocation across all publicly available stocks and bonds. Instead of just buying a handful of your favorite stocks, or even buying just the S&P 500 which represents US large cap stocks, practice smart diversification by investing globally. For US investors, a good mix is around 65% US, and 35% World Ex-US stocks. Do this with low cost index funds that capture the total market return. Within stocks, an advanced concept is to add additional weight to stocks with higher expected returns, such as small cap and value stocks. For example, from 1930-2019 the Dimensional US Small Cap Value Index outperformed the Fama/French Total US Market Research Index by 3.98% per year.

 

For those who are skeptical about this datapoint, consider the frequency at which the small cap value index outperformed the market index over all rolling 10-year periods (90%) was higher than the frequency of the total market index outperforming risk free one-month US treasury bills (87%). Both the total market premium over T-bills and the small value premium over the market can be explained as rational compensation for taking more risk. Academic research has concluded that small cap and value stocks have unique and independent risks from the market, and these risks result in these types of stocks having higher expected returns. On the bond side, global diversification is also beneficial, and fund companies like Vanguard offer global bond mutual funds and ETF’s worth considering as a simple one fund solution. My firm uses funds from Dimensional Fund Advisors, but these funds are only available through financial advisors. There’s usually no reason your total portfolio needs to consist of more than about 5-7 funds. Arguments for a few more or a few less can be made, but portfolios of a dozen or more funds are probably overly complex.

 

Rebalancing

This is the last core principle to long-term success. Rebalancing is the act of bringing your portfolio back to your targeted allocations on a periodic basis. This can be done systematically based on the calendar (such as annually) or based on tolerance bands where you assign a minimum and maximum allowable percentage range for each fund in your portfolio to drift, which you review monthly or quarterly. For example, if you had an equal 50/50 allocation to two different funds, differing performance between the funds will cause the allocation to drift over time to where you’ll need to sell some of the fund(s) that has become overweight relative to your target and use the proceeds to buy some of the fund(s) that has become underweight. If your portfolio has a mixture of stock and bond funds in it, this will keep the volatility of your portfolio in line with your objectives outlined in the asset allocation section. For taxable accounts, it makes sense to rebalance with cash flows when available in order to minimize taxable events. If you’re regularly contributing new money to your account, you can apply it to funds that are underweight. Additionally, you can apply dividends paid in cash towards funds that have become underweight. For employer retirement accounts, check to see if automated rebalancing is a feature available within your plan.

 

Conclusion

Good financial planning and portfolio management is not particularly difficult, and there has never been a better time to be an investor from the standpoint of having access to funds that cover stocks and bonds all over the world.  But the process does require a lot of upfront knowledge and discipline, especially during extreme markets like we’ve seen so far in 2020.  As the cartoon character Pogo said, “we have met the enemy, and he is us.” If the entire process still seems more complicated than you’d prefer, or if you’d simply like a second opinion from time to time, contact an independent fee based financial advisor that can help you construct a well thought out plan in line with these principles for either an hourly fee or based on assets under management.  My firm can provide both service models to individuals, and we offer a complimentary 15-minute phone call to determine if we might be a good fit for your needs.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

Related articles

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 255 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 650 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 481 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 307 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 1,345 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 5,712 views
  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 9,308 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 10,951 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 11,316 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 9,484 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs