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!