SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

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

Do You Have a Written Investment Plan?


Meb Faber recently polled his twitter followers, and found that only about 25% have a written investment plan. Your investment plan should be based on your willingness (risk tolerance) and need (required rate of return to meet your long term goals) to take risk. 

Investing without specific goals in mind and a written plan designed to achieve those goals is like sailing on a ship without a rudder, wandering aimlessly whichever direction the wind blows.

So where to begin?  First, think about your goals. Let's assume you're 50 years old, and would like to retire by age 62, and have accumulated $250,000. Ask yourself the following question:  If I were to retire not at age 62, but next month, about how much would I need in monthly income from my portfolio above and beyond what I'll receive from estimated social security and pension benefits to maintain my standard of living?

 

Let's assume the answer to this question is $3,000/month, in today's dollars. This is $36,000 per year. Using historical trend line inflation assumptions of 3% annually, $36,000 today would be about $51,000 at age 62 ($4,250/month). 

 

Next, divide $51,000 by 4.5% (a reasonable portfolio withdrawal rate for a 3 decade retirement), which equals $1,133,333.

 

Congratulations! You've now began the process of creating a date specific, dollar specific, retirement accumulation plan. If at age 62, you began to withdraw $4,250/month, increased by 3% per year for inflation, from a $1.1 million nest egg, the odds are in your favor that your portfolio will outlast you if invested wisely and followed faithfully (something I will only briefly touch on in this post). 

 

The next question should be obvious: How are we going to grow our portfolio from $250,000 to $1.1 million over the next 12 years? This becomes a question of required rate of return. Without any further contributions, this would require about 13.4% CAGR (compound annual growth rate) over the next 12 years. Possible, but just as we assume trend line inflation, I wouldn't suggest building a plan that assumes anything much different than trend line asset class performance. Many will also factor in current valuations for global stocks and bonds, but we're intentionally keeping it simple here for illustrative purposes.

 

Since 1926, cash (US T-bills) has returned about 3.4% per year. The US stock market has returned about 10.6% per year. This is an equity risk premium (equity return in excess of cash) of about 7%. With cash currently yielding about 2%, that would imply an equity return assumption of about 9% before fees and expenses and any other portfolio assumptions such as global diversification, tilts towards known factors such as size, value, and momentum...valuation considerations, etc. Asset allocation assumptions such as how much (if any) to keep in cash, bonds, and alternative strategies should also be accounted for depending on your personal risk tolerance for both portfolio volatility and tracking error (performance variation) from standard benchmarks like the S&P 500. And let's not forget about portfolio management decisions, such as when and how often to rebalance as your portfolio allocations drift over time. The more specific you can make your plan, the less decisions you'll be forced to make during the heat of battle when human emotion and behavioral bias get involved.

 

Assuming you have the historical perspective, patience, and temperament to earn the equity risk premium with disciplined behavior, a diversified equity portfolio returning 9% would require annual contributions of just under $20,000 for the next 12 years. A portfolio that includes lower expected return asset classes, or is impacted by human intervention that results in less than market returns, will require more. Potentially much more.

 

The next consideration is what type of account(s)? Regular taxable brokerage? IRA? 401(k)? Maybe even a triple tax free HSA, if eligible? Tax implications have a substantial impact on your plan over the long run, and can often lead to higher net returns than selecting "better" investments, whatever that means. 

 

Fast forward 12 years, and let's assume you've made it to the finish line. But then you realize what you thought was the finish line is really just the beginning! Now what? Accumulation now seems like it was the easy part, and now you need an income plan from your portfolio for the next 3 decades...Do you switch from equities that got you here to bonds because they provide "income?" Using the same assumptions as before, with cash yielding 2%, and bonds about 3%...ask yourself this common sense question: Would you rather face a 3 decade long retirement taking 4.5% per year from bonds producing income of 3% or from equities with a history of producing 9-10% total returns? At this point, the conventional wisdom that bonds are "safe" and equities are "risky" is probably beginning to sound a bit backwards.

 

An equity focused portfolio may be as necessary post retirement as it was pre retirement. Managing sequence risk with concepts such as "guardrails" where you will keep your withdrawals within a floor of 3% and ceiling of 6% should also be considered as portfolio values fluctuate. A pre-retirement emergency fund of 3-6 months of expenses could be increased to 2 years of expenses in retirement as well, meant to be accessed during bear markets when equity values are depressed.

 

I'll stop here for now, as I've given you plenty to think about and work on in building out the first draft of your long term investing plan. A small percentage of individuals will be interested and able to do this on their own, and maintain discipline at market extremes.  The rest may find that a relationship with an investment advisor who offers comprehensive financial planning, perspective, and behavioral coaching provides value and peace of mind far in excess of the fee they are asked to pay. Vanguard Research believes this value to be about 3% per year, many multiples of what good advisors charge in annual fees.

 

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™. 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 is managing the LC Diversified portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.   

  

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Intrinsic vs. Extrinsic Value

    A lot is written about intrinsic value, but how does it work and what does it mean? The fact is, intrinsic value is an estimate of how future premium levels will change. It is base don current volatility and a set of assumptions. In dividing premium into its component parts, most descriptions deal with intrinsic and time value.

    By Michael C. Thomsett,

    • 0 comments
    • 124 views
  • McDonald's, Not A Shelter in the Coming Storm

    The amount of time and effort that investors spend assessing the risks versus the potential returns of their portfolio should shift as the economy and markets cycle over time. For example, when an economic recovery finally breaks the grip of a recession, and asset prices and valuations have fallen to average or below-average levels, price and economic risks are greatly diminished.

    By Michael Lebowitz,

    • 0 comments
    • 130 views
  • Risk Depends On Your Time Horizon

    Those who are nearing retirement and those who have recently retired represent the majority of my financial planning and investment advisory client base. One of the most common mistakes I hear from these types of individuals is something similar to “I no longer have enough time for the market to come back.”

    By Jesse,

    • 0 comments
    • 113 views
  • Estimating Gamma for Calls or Puts

    In a recent article, the details for estimate Delta were explained. This article deals with estimates of Gamma, which is denoted with the Greek symbol Γ. This calculation measures the rate of change in Delta and is summarized in percentage form. It is alternatively called the option’s curvature.

     

    By Michael C. Thomsett,

    • 0 comments
    • 382 views
  • Why Options Traders Fail?

    In the last 8 years, I trained thousands of options traders. I have seen many success stories, but also a lot of failures. There are a lot of reasons why many options traders fail. Here are the most common reasons, courtesy of our good friend and veteran options trader Gavin McMaster

    By Kim,

    • 0 comments
    • 826 views
  • Using ORATS Wheel To Test Entries and Exits

    My favorite option strategy backtester is ORATS Wheel, which includes a free trial for those interested. In the Steady Momentum PutWrite Strategy (SMPW), we sell out of the money puts on global equity indexes and ETF’s while holding our collateral in short and intermediate term fixed income ETF’s.

    By Jesse,

    • 0 comments
    • 547 views
  • Estimating Delta for Calls or Puts

    Options trading relies on many estimates of value and volatility. Among these, the most useful estimate is Delta. Even knowledgeable options traders might not fully understand the “Greeks” and how they operate, especially with one another. They are directly related and are useful in making comparisons of market risk and volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 531 views
  • Are Covered Calls a ‘Sure Thing?’

    Most covered call writers enjoy the regularity and reliability of the position. In the majority of cases, the covered call will be profitable, even when underlying shares are called away. This assumes that the strike is higher than the basis in the underlying, and that the call writer understands the real limitations to the strategy.

    By Michael C. Thomsett,

    • 0 comments
    • 883 views
  • Lessons from Bill Ackman's comeback

    Bill Ackman is an American investor, hedge fund manager and philanthropist. He is the founder and CEO of Pershing Square Capital Management, a hedge fund management company. Ackman is considered by some to be a contrarian investor but considers himself an activist investor.

    By Kim,

    • 1 comment
    • 2,069 views
  • Steady Futures 2019 Performance Analysis

    Steady Futures began trading the 50K portfolio in July 2019. It produced a 8.5% return during its 6 months of performance (18.0% annualized). We had three goals when we developed this system. First, we wanted a robust system that benefits from turmoil in the markets.

    By RapperT,

    • 0 comments
    • 558 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido