They say that when you’re investing for the long haul, you simply need to stay in the game for long enough and the results will speak for themselves in the end. Markets go up and down all the time; it’s simply the cost of doing business in the investing game! So, as investors, we just need to carry on and block out all the noise…
I wish it were all that simple… But as always, each individual’s strategy becomes unique because each person has their own specific combination of: timeframe, goals (objective), risk tolerance, etc.
For myself, I completely subscribed to the strategy or rapidly accumulating assets during the last market downturn. 4 years later, I couldn’t be any more happy and grateful for all the progress that I’ve made because I elected to invest in a time of fear.
But after 6 years, it’s very obvious to most everyone that this latest bull run has now become overstretched. The market hasn’t had a pullback in quite sometime, and everywhere I look, I’m finding overly exuberant investors who are trying to pile on in this game because “making money is so easy now”…
I live in the Bay Area, and bidding wars are as intense (if not more so) than ever before. Homes are routinely listed on the MLS overpriced, and buyers are yet somehow willing to overpay by another $50,000 or $100,000 above listing. No sweat. Money grows on trees, apparently…
Well, as I’ve alluded to in many of my previous posts, I simply want no more part in this game anymore… Not at this stage when greed is running rampant again.
Cash Out Refis
Earlier this year, I elected to refinance two of my rental properties so that I could pull out much of the equity build up that I’ve experienced these last few years. I pulled out ~$200,000 and at present moment I have about $130,000 in liquid funds.
Almost immediately after completing the second refi, I put my capital back to work and attempted to replenish my individual stock portfolio. Yes, I realize that investing in an index fund will most likely yield higher returns in the long run, but I wanted to handcraft my own personal portfolio to fit my own specific needs — I wanted to roll the dice on some growth stocks, try and identify some future Dividend Aristocrats, and park a great chunk of funds into low beta, reliable large caps.
At present day, here’s what my individual stock portfolio looks like:
Just like before, when I first started the path to early financial independence in 2012, I was doing what I knew best — building wealth one brick at a time…
At first glance, I could try and argue that I’ve put together a solid list of holdings that ought to do well over the long haul, once you filter out all the short-term market noise…
And I very well could elect to keep sticking to the gameplan, injecting fresh capital like clockwork as I look to build up the portfolio further…
But lately, I’ve had a change of heart… Although I still don’t regret reconstructing my individual stock portfolio, after recently clearing the $100,000 marker, I think that I will give myself a break and focus my attention back on defense again.
What does it mean to play more defense? My own approach will be to focus on stashing cash and if I do invest fresh capital, I’m going to stick to investing in index funds.
Yup, I’m going back to the tried and true approach; the one I first started utilizing way back in college.
How’s that for unexciting?
Market Crashes Scare Me
Further, as it pertains back to my individual stock portfolio, I’m going to deviate from the typical Buy and Hold approach that many investors like to employ.
Rather, I’ve decided that I’m OK with exiting out of positions, and will gladly take profits off the table right now. Keep in mind, my situation might be atypical to that of many other dividend growth investors out there — I have an ownership stake in 8 properties and over $1MM in debt that I am responsible for. In the event of a disastrous market collapse, I will be encumbered by a massive amount of debt that I will somehow have to figure out a way to manage as the world seeming falls apart. Unlike dividend growth investors who hold no debt, I won’t be able to simply keep on investing, regardless of rain or shine. Rather, my primary objective at that point will be to protect my real estate investments at all costs! The majority of my net worth and passive income are held in real estate, so there’s no way I’m going to let that go without a fight!
In a market crash, you could get hit with more than a few series of whammies. Equity build up gets wiped out. Properties go underwater. Stock portfolios are bleeding red. Tenants can lose their jobs. I could lose my job. Rents could get slashed.
That’s a very scary place to be.
Even though I didn’t experience such devastation during the last down-cycle first hand, I would be a fool if I didn’t plan for the worst!
Market crashes can go on for a prolonged period of time. Should that happen, then I will need to have ample cash on hand to weather those storms. So, again, we are back to stashing lots of cash. I’ve got about $41,000 squirreled away for a rainy day, but I don’t think that’s sufficient… I gotta keep working on growing the pile!
But, perhaps there’s more I can do as well…
The primary reason why I’m investing in individual stocks again is to generate additional income (along with some side hustle appreciation plays). With my own individual stock portfolio, this has been accomplished by purchasing quality dividend holdings such as: Johnson and Johnson (JNJ), Coca-Cola (KO), Chevron (CVX), AT&T (T), Toronto-Dominion Bank (TD), and Realty Income (O).
But as we all know, individual holdings will always be more inherently risky than holding an index fund, regardless of how stable a company may have been in the past; the probability that a Dividend Aristocrat or Champion going bust is low, but NOT impossible!
So, in the interest of risk management, I’ve again accepted the fact that I’m OK with selling off branches of my dividend tree from time to time. One way that I’m utilizing the sell angle is that I’ve started selling covered calls on my positions. That way, if the market pushes prices north of what I’m comfortable with, I’ll gladly walk away, content with not only selling at at high price, but also collecting a premium along the way.
Further, upon closing out a position, I will consider selling cash secured puts to acquire shares of any other companies that I feel are being undervalued by the market. This approach will again let me collect additional income in the form of a premium, and I also get to redistribute the freed up funds from any covered call sales. Again, at this point, I don’t plan on injecting any further fresh capital into the individual stock portfolio, so the funds will only be recirculating as positions are bought and sold into.
I should point out that with this reallocation of funds strategy, I will only look to sell and acquire shares of large cap companies that have a reputation and history of paying a growing dividend. I’m not going to be utilizing covered calls and cash secured puts trading speculative growth stocks! Instead, I will only enter and exit out of positions that I would have been comfortable holding for the long haul, anyway…
If the covered calls and cash secured puts expire worthless, that’s just fine by me; I’ll simply collect the dividends per usual along with any premiums. For all intents and purposes, by simply holding, the results would be identical to following a strict Buy and Hold approach… which was my original strategy all along!
At this stage of the game, it seems like a no-brainer for me.
Here are some covered calls that I’ve recently written:
SBUX May 29 2015 51.00 Call $16.34
KO May 29 2015 42.00 Call $17.66
TD Jun 19 2015 47.50 Call $24.34
T May 22 2015 34.00 Call $10.34
That’s an additional income of $68.68 for doing nothing. I realize that selling positions and cutting dividend branches is never popular, but as I mentioned above, I’m exiting out of the Rapid Asset Accumulation Phase at this juncture of the bull cycle.
As readers know, I always like to keep an open mind and adapt to market environments. In other words, just because I’m electing to focus on the Wealth Preservation Phase at this time, it does not mean that there won’t be another point in the future when I am again gungho about investing and going full assault into buying up assets again.
Markets go through cycles; I’m going to follow their lead.
The market keeps going up! As such, I’ve decided to shift gears and rethink my investment strategy. Upon clearing the $100,000 marker on my individual stock portfolio, I’ve decided that it is now prudent for me to stop working towards rapidly building up this fund, but instead to focus more on saving cash and purchasing safer index funds with any fresh capital.
Further, in an attempt to play even more defense, I’m going to start utilizing options to write covered calls and cash secured puts to generate additional income on top of the dividend income. Should my positions be called away, I will gladly give them up at a strike price I deem reasonable for selling.
I’m doing my best to not fall in love with any of my investments. I’ve written 4 calls to start, but will probably continue writing a lot more in the coming months.
Yes, Buy and Hold is a wonderful strategy, but at this time, I do not believe it’s necessarily the best one for my particular stock investment portfolio. I will be brutally honest with readers and freely admit that protecting my real estate portfolio is of paramount importance to me at this time.
By selling stock positions prematurely, you could argue that I might miss out on future gains or be unable to get back into a holding at a favorable entry point. That’s all very possible, but a consequence that I’m comfortable with accepting. I’m not at the beginning stages of my investment career and I’ve planted my fair share of financial freedom seeds; I don’t need to play hero ball, and will now be content with just hitting singles, with a few doubles mixed in here and there. As such, if any stock position I hold gets to a point where I feel that it is overvalued, I will sell.
Investing is never without risk, so we cannot underestimate the importance of risk management in our strategy. For instance, in my own situation, if the markets keep going up, I win… even by doing nothing more. That’s because my existing holdings in stocks and real estate will likely keep increasing in value. However, if I keep rolling the dice and the market does decide to crash, I could be left facing some serious pain! But if I’m able to toughen out the next crash by playing strong, intense defense, then I should be able to get past any hurdles unscathed. When the market inevitably rebounds again, I’ll be able to go back into Rapid Asset Accumulation and buy up everything in sight…
No one said investing was easy! Just like life, things don’t always proceed in a straightforward, linear trajectory. I’m deviating a bit from my comfort zone, but hopefully I’m doing the right thing at the right time…
In any event, live and learn! 🙂