Are You Afraid of The Stock Market? If you are like most folks I know, you are afraid of the stock market. I must admit that those fears are well founded. Many retirees have lost a considerable portion of their nest egg despite having a diversified portfolio of stocks. It hasn't been easy for me either even though I have spent a considerable amount of time evaluating conservative investment strategies. As I have said many times before, the key to a successful retirement is cash flow. How much money is coming into your household as opposed to how much you have to spend to fund your lifestyle. I started this blog four years ago to emphasize that point. While I have periodically drifted to other subjects during that time, cash flow remains the central point of my investment strategy. One thing I have learned for certain: If I rely on bank insured deposits to provide my retirement income I will either be forced to severely curtail my lifestyle or go back to full time employment at the age of 72. In recent months I have extolled the virtues of cutting back to a more simple lifestyle; however, if I relied on insured deposits, my life would be much more simple than I would like.
How Do You Generate Income In This Environment? How about a "simulated CD?" If you have never heard of that one, don't feel alone. I know very few investors who use it and it isn't very well publicized. Here is how it works. Step one. Buy a portfolio of dividend producing stocks. Step 2. Sell a long term covered call against that position. By utilizing this strategy you can take advantage of the fact that once a company establishes a dividend policy, they take pride in maintaining that dividend. While this isn't a sure thing, it is usually much more dependable than trying to depend on buying low and selling high to fund your retirement. Step two. Sell a long-term, in the money call against that position. One sure thing in the market is that the premium portion of a call option will be zero at the time the option expires. Here is an example: AT&T is currently selling for $25.40 per share. The market will pay me $3.15 for an option to buy the stock from me at $22.5 on or before January 2011. The $3.15 is mine to keep as of the day I sell it, therefore, my net investment is $25.4 minus the $3.15 I received for the option or $22.25. If the market stays flat, I will sell for $22.5 for a return of 1.12%. I will also receive two dividends during that period of a total of $.84. This gives me a total return of 5.09% for 7 months or an annualized yield of 8.73%. What does this accomplish? It gives me a yield of 8 times what I could get on a CD of comparable maturity and downside protection of 12.73%. While this isn't a huge return, as stock market investments go, it competes very well with a CD on a risk adjusted basis.
You Don't Have To Use Dividend Paying Stocks. As of today's date, I could buy Devon Energy at $69.9 per share. If I sell the $60 January 2011 call I could put $13.35 in my pocket leaving me a net cost of $56.55 per share. Assuming the stock is above $60 in January, my return is 6.1% for 7 months or an annualized yield of 10.46%. Again, I receive a return of 10 times the CD rate and $13.55 downside protection or 19.6%. On a risk adjusted basis, this is very attractive. To tell the truth, I am not all that sure the government can stand by their insurance on those FDIC guarantees either. Do I think you should employ a strategy like this exclusively? Of course not but its not a bad strategy for some of that spare cash you have laying around in your investment account.
Politics Rears Its Ugly Head. When George W. was president, I grew tired of hearing people criticize him. Not that some of it wasn't valid. It was the personal attacks I didn't like. At that time I made up my mind that I was not going to do the same thing when the new president came into office; however, this doesn't mean I can't be critical of the policies endorsed by the party in power. So far, I find it difficult to find much good to say about the polices of this administration. The most difficult to accept are energy policies. The cold hard facts tell me that we can't afford to move away from fossil fuels at this time. We simply can't afford the "Cap and Trade" fiasco that congress is trying to pass. One of the least acceptable provisions would require that potential home sellers to obtain an "energy audit" that assures the home will meet certain efficiency standards at the time of sale. Those who don't meet those standards will have to remedy the situation before the home can be sold. With the current malaise in the housing market this will place an additional burden on already overburdened sellers. Our freedoms continue to disappear as the government decides they know more about how to run our lives than we do. It's time to put a stop to it.
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