No trades today.

music selection:  “AC/DC” — Joan Jett & The Blackhearts

weigh-in:  211.2 (1.6) – Progress!

One of the most things that determines the success of an investor is asset allocation.  Putting all your eggs in one basket can result in a ruinous loss that leaves you are ‘start over’.  My asset allocation probably looks a lot different than the typical investor.  This is by design as I am in early retirement and my income needs outweigh my future growth needs.

My biggest allocation is to high yield equities.  I put REITs, MLPs, and BDCs in this category.  There are limited growth opportunities in the space.  You go here for current yield at the cost of maybe not keeping up with inflation.  Other allocation areas must take up the growth slack.  I am currently about 38% in these type of stocks although the definition is a little fuzzy because are also used as options plays.  I hope over time to grow the portfolio into broader use of fixed income and discounted bonds for more security and lower volatility.

My next biggest allocation is to options.  This is mostly what I post about on the blog even though it isn’t my most important allocation.  This is mostly a matter of volume.  I roll these trades roughly every six weeks.  My high yield equity allocation tends to sit without being churned for months or years at a time.  There just isn’t much to talk about there.  I target around a third of my portfolio in options but am currently a little over allocated at 35%.  The core of the strategy here is to write (sell) options on equities that are already attractively priced and hopefully somewhat defensive.  I love to work with Big Cheap Tech names like MSFT, QCOM, AAPL, and CSCO.  The other leg of this strategy is long dated, out of the money UVXY puts.  I target about 10% of my portfolio there (or about a third of my options).  It has been the most important position to allow me to retire early.  I have easily cleared six figures in profits on UVXY.

One of my favorite areas to allocate funds to is what I think of as Fixed Income.  I’m a little less than 22% in this area and it is my focus for deploying trading profits as I grow the portfolio.  In this area, I have mostly closed end funds.  I have CEFs in municipals, international bonds, preferred securities, and senior variable debt.  The yield isn’t as good as my high yield equity allocation but the security is much higher.  I think it is important to have some low beta allocation when you have a large options allocation as my options strategy could be thought of as “short volatility”.  The fixed income thus acts as a hedge to that while still providing an acceptable level of income.

I want to get up to 15% in Discounted Bonds.  This is a very lucrative area of the market and the actions of the Fed have created a once in a lifetime opportunity to really earn superior returns with limited downside risk.  I have been as high as 8% here but am currently below 5% due to early profit taking.

Lastly, I make room from some speculations.  This is currently up to about 2% after some gains.  I have this split between a few thousand each in Fannie Mae (FNMA) and the Junior Gold Miners ETF (GDXJ).  I expect to do well but recognize a high level of risk and keep my exposure light.

Finally, all of the above applies to the accounts I rely on to pay the bills.  I need an income centric approach there.  For my tIRA, I’m more concerned about growth and staying ahead of inflation.  As a result, I have 10% of the tIRA in UVXY puts and substantially all the rest in insurance.   Insurance is America’s best business and where you should put money you want to compound long term.  It is important to go with Property and Casualty insurers of Life Insurance ones as the latter have no competitive moat.  They all use the same actuarial tables.  It is also important to focus on insurance companies with a combined ratio less than 100 (there are many good ones in the high 80s and low 90s).  Finally, you want to pay less than 1.1 times book value.  If you can do these three things, it is very reasonable to expect long term compounding upwards of 15% a year.  I have done very well with AFL, AXS, FRFH, and MKL this way.

Devour your prey raptors!

Thoughts on Allocations

Never miss another opportunity to devour prey!

8 thoughts on “Thoughts on Allocations

  • September 12, 2016 at 8:35 pm

    Nice post! Couple questions if you don’t mind!
    – UVXY allocation 10% is this the notional value or the actual cost of options?
    For example 19 puts in UVXY trading for 6.50. Is this $1900 or $650.

    – What is the loss thershold on these? Do you realize losses if we see market spikes? Similarly, what are the gains when you take them off?

    I’ve been doing synthetic calls on these, short vxx, short put. Got burned HARD this Friday.

    • September 12, 2016 at 10:23 pm

      I look at the UVXY allocation as the cash outlaid to purchase the puts. That is ultimately my exposure to loss. I always go with the longest dated LEAP put available. I’ve often been *deeply* in the red after volatility events. But I’ve always recovered with enough time. My worst return so far has been 16% annualized. My best was about 500% annualized. The typical return is in the 150-200% range. That isn’t to say I can’t ever lose. You pays your money, you takes your chances.

      I don’t like being short the underlying because shares get hard to borrow during volatility events. You can get forced out of the trade by your broker at the very worst time. Not to mention the borrow fees get very high when shares are scarce.

      • September 12, 2016 at 10:30 pm


        Wouldnt be better if you just buy the ATM PUT instead of OTM PUTS?? What I am missing here?

      • September 13, 2016 at 12:31 am

        Thanks. Also not to mention these puts are about a dollar wide! Longest dated LEAPS has an expiration of 494 days..all the way until Jan of 2018. Do you go that far out?

        I picked up some 30 delta Jan 2017 this morning hope to try this experiment small.

        • September 13, 2016 at 2:06 am

          Yes, I am long the Jan2018 puts. I want as much time to be right as possible.

          • September 13, 2016 at 3:16 pm

            Thanks Lizard King!

            Sorry forgot to ask, when is your usual “entry” point? Would a day like today be good? Typically do you wait for market corrections?

          • September 13, 2016 at 7:54 pm

            It is usually on low volatility days. Reason being, as soon as I close one put, I open another at a new strike. Sales usually occur at a profit target that is reached on the ‘good days’.

  • September 15, 2016 at 6:25 am

    High yield equities will definitely jump start any passive income stream but you really have to watch those payouts and many tend to get cut over time. Options are another recently popular method for generating income among our fellow dividend bloggers. Looks good but seems a bit too aggressive for my taste. Thanks for sharing.


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