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.

Investment Ideas for Conservative Investors


Investors with low willingness or need to take risks often look to bank and/or life insurance company fixed-rate products to increase potential returns instead of leaving their money in conventional checking or savings accounts. Some of these product types are CD’s, structured notes, fixed annuities and fixed indexed annuities.

On the surface these products appear to be risk-free but multi-year interest penalties and surrender charges mean investors could lose money if they need to liquidate capital quickly. Investors have more options than they might realize when constructing low risk investment portfolios that could easily be established with certain mutual funds and ETF’s.
 

First, when investing it’s important to consider the impact of taxes on assets held outside of retirement accounts. Ordinary interest income generated from bank products like CD’s and savings accounts is taxed as ordinary income in the year earned (no tax deferral). Annuity products are allowed tax deferral of interest until withdrawn, but again at the higher ordinary income tax rates. Also, withdrawals from annuities when under the age of 59.5 may experience 10% penalties on any earnings in addition to ordinary income taxes.


Mutual funds and ETF’s can be more tax-efficient and provide better liquidity than bank and insurance products. For example, dividend income on municipal bond funds can be both state and federal income tax free, and at minimum, they are federal income tax free. Dividend income on US Treasury funds is state income tax free. Equities can be even more tax-advantageous.With tax-managed mutual funds from companies like Dimensional Fund Advisors (DFA), techniques are usedto produce mostly or entirely qualified dividends (taxed at more favorable capital gains rates)andtax-loss harvesting to minimize short term capital gains. Then there is simply the ability to defer capital gains on shares until sold that makes equities good options. This tax-deferral on capital gains is the primary benefit of the ETF structure for equity ETF’s.

In my article “The magic of compounding, and the tyranny of taxes,” I showed how important taxes are in evaluating investment products with a simple, hypothetical example. I recommend all investors read the article. Ignore taxes at your own peril!
 

Since 1931 the term premium of 5-year US Treasury Notes (5YT) in excess of 1-month US Treasury Bills (BIL) has been 1.8% per year (5.1% annualized return for 5YT vs. 3.3%for BIL). A conservative investor could easily roll over 5YT’s as they come due every 5 years, and ladder them annually to create liquidity events. This is not much different than a CD but with better tax treatment for those with a state income tax. Alternatively, many different low-cost ETF and mutual fund products exist with these types of holdings.

5YT’s historically have very low correlations to equities and often experience above-average returns during periods of equity market stress/crisis. For example:

image.png


With this knowledge in mind, investors are able to diversify our 5YT’s with small allocations to equities with minimal or no increase in risk. To represent “equities,” we’ll focus on the highest expected return equity asset class,Small Cap Value. We’ll use DFA mutual funds to represent US Small Cap Value (DFSVX), International Small Cap Value (DISVX) and Emerging Markets Value (DFEVX), as well as the Vanguard Intermediate Term Treasury mutual fund (VFITX) as a proxy for 5YT’s. The analysis period will be from April 1998 – March 2019 (April 1998 represents the earliest common inception date for these funds).

image.png


During this period, BIL produced annualized returns of just 1.87%. This is below the very long-term average due to the Federal Reserve Bank reduction of short-term interest rates to zero for several years after the 2008 financial crisis. 5YT’s earned 4.75% per year, in the form of the Vanguard mutual fund. Interestingly, adding a 10% and 20% allocation to equities actually lowered risk while also increasing returns. This is the power of diversification at work! Risk begins to increase with a 30% allocation to equities. Let’s also remember that this period includes 2 of the largest bear market periods for stocks that the market has everseen If including any equity allocation would increase risk for investors, we’d expect it to be during this period. On an after-tax basis, the portfolios that include equities look even better compared to alternatives that generate regular taxable ordinary income.
 

Of course, these portfolios are not examples of “free lunches,” as we can see that there were still some occasional temporary declines. I come across investors all of the time who have excessive amounts of cash on hand often not even earning competitive savings account rates. These investors repeatedly look to banks and insurance companies for investment products.  If investors have expected time horizons for accessing their money of 24 months or more, a conservative portfolio of tax-efficient mutual funds and/or ETF’s should be considered.

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

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

  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 260 views
  • ETF Vs. Stock: Note Down the Vital Points

    Today’s small investment can fulfill your dream of high living tomorrow. But investing blindly can make it reverse. We all want to get a high return on our investment. Stocks or ETFs can be the best option for you in such cases. The investment in stocks or ETFs is not very different except few noticeable points.

    By Kim,

    • 0 comments
    • 292 views
  • Considering Trading? Here Are Some Trading Options You Need To Know

    Whether you are considering dabbling in day trading or looking for a longer-term investment if you want to start trading it will serve you well to carry out a little due diligence in advance. There are a number of markets that you could use and understanding how each one works and what they are all about is key.

    By Kim,

    • 0 comments
    • 5,866 views
  • Why Should You Paper Trade Options

    In my previous article I shared some thoughts why I believe traders should start with paper trading before committing real capital. Not everyone would agree, but today I would like to share another article by a trader I respect very much. The original article was published here

    By Kim,

    • 0 comments
    • 295 views
  • Is Long Call Better than Bull Credit Put Spread?

    The trigger to this article was a question posted on the forum: "why we should use bull credit put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?" You can read the discussion here.

    By Kim,

    • 0 comments
    • 446 views
  • Strike Selection: A 'Sweet Spot' for Option Sellers?

    The words above are powerful because they're approach-agnostic. It doesn't matter if you're an old-school pit trader who swigs grit instead of coffee before the opening bell, or a Gen Y technocrat who codes trend-detection algorithms. All traders live and die by The Four Words. If you consistently buy low and sell high, then you will be profitable.

    By Kim,

    • 0 comments
    • 1,557 views
  • Post-Earnings Implied Volatility Crush

    Earnings crush is the fall in implied volatility after earnings is announced. Typically, earnings announcements cause the price of the stock to move more than normal. The move will have more effect on short dated expirations since the day of earnings large move has more weight than the rest of the days with normal moves. 

    By ORATS_Matt,

    • 0 comments
    • 352 views
  • Why Not to Hold Strangles Through Earnings

    In my previous article, I described a strategy of buying strangles a few days before earnings and selling them just before earnings. In this article, I will show why it might be not a good idea to keep those strangles through earnings.

    By Kim,

    • 0 comments
    • 387 views
  • How to Prepare for Crypto Downturns

    Most cryptocurrency owners skipped a heartbeat when the bitcoin fell to 50% from its all-time high. According to experts, such nasty downturns are natural, and the crypto market may witness such downturns now and then.

    By Kim,

    • 0 comments
    • 520 views
  • Tradier Brokerage Special Offer

    Tradier Brokerage is partnering with SteadyOptions to offer a special promotion for SteadyOptions customers: Open an account with Tradier Brokerage and get no subscription fees for 3 months, plus all ACAT fees will be waived. After opening an account, you will also receive 3 months of free access to TradeHawk, our full-featured customizable trading platform.

    By Kim,

    • 0 comments
    • 662 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 Expertido