Using Covered Calls

When the stock market is volatile, I like to sell covered calls as part of my trading strategy. For reference, selling a call obligates me to sell the underlying stock at a specific (strike) price. The buyer of the call purchases the right to buy the underlying security at a specific (strike) price. When a call is covered, the seller owns the underlying stock.

Covered calls provide me the following benefits:

A premium over the sale price. For example, if a stock is at $55, I can sell a $60 call for a $1 premium. If the stock is at $60 or higher at the call expiration date, I will receive $60 for the stock. Total sales price equals $60 strike price plus $1 premium or $61.

Earnings during a sideways trend. Using the same example, if the stock is under $60 on the expiration date, I keep the stock and the $1 premium for the call. Thus, I earned $1 while waiting for the stock to reach $60.

Insurance against a decline. For example, if a stock is at $55, I can sell a $45 call for $10.50. If the stock closes above $45, the totals sales price will be $55.50 ($45 strike price plus $10.50 call premium). If the stock falls below $45, I keep the stock and the $10.50 premium.

To get these benefits, there is an opportunity cost for using covered calls. I forgo any gains above the strike price since I am obligated to sell at the strike price. For example, if I sell a $60 call and the stock advances to $80, I am still obligated to sell at $60 and, therefore, do not get the $20 gain above $60.

Hence, I prefer to use covered calls at short term highs when a stock is in a sideways trading channel. Thus, when the stock pulls back, I keep the call premium, wait for the stock to rally, and start the cycle again.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Deficit Panel Reduction Recommendations

A CNBC.com article, Presidential Panel Releases Deficit-Reduction Proposals, provides a good summary of the preliminary recommendation from the bipartisan panel on deficit reduction. A final report is due on December 1, 2010.

Overall, I like the total package recommended. The recommendation has three major areas of focus:

Spending cuts. The proposal puts a cap on government spending at 21% of GDP, down from the current 24% of GDP. This includes reducing the 2012 budget to 2010 spending levels, lower defense and non-defense spending by $100 billion each by 2015, freeze government employee salaries for three years and reduce the federal workforce by 10%. Automatic cut would take place if Congress exceeds spending caps.

Tax code overhaul. The proposal eliminates $1.1 trillion of exemptions and deductions, such as the mortgage interest deduction. In addition, it will simplify and lower the tax rates paid by individuals and lower the tax rate paid by corporations.

Reduce health care costs. The proposal would reduce payments under Medicare and Medicaid, increase co-pays, and cap awards under malpractice suits.

The proposal also makes recommendations to ensure the long term viability of Social Security, but would be covered outside of the deficit reduction program.

The part I like best is the proposal to limit government spending at 21% of GDP. The limit will cause government to focus on being choiceful about spending and eliminating ineffective programs. Another positive point is that the limit will also cause government to put more effort on growing the economy since a higher GDP is the only way to increase the amount of funds available for spending.

I will be very interested in the debate and comments in the coming months.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or policy advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Retirement Mistakes to Avoid

Six Retirement Mistakes to Avoid by Cindy Pearlman at CNBC.com summarizes six mistakes to avoid based on interviews with financial analysts. Here is the list:

1. Not utilizing tax advantaged savings options. Savers get tax breaks for using IRAs and 401Ks to save for retirement, including deductions for contributions and tax free earnings.



2. Not utilizing catch-up provisions for those 50 and older. For those at least 50, an extra $1000 can be contributed to an IRA and an extra $5,500 can be contributed to a 401K.



3. Withdrawing or borrowing from your retirement plan. The article notes that this money can never be replaced. In addition, taxes and penalties may need to be paid.



4. Underestimating how long you’re going to live. The U.S. average life expectancy is 77.9 years. Some financial planners are using life expectancies of 90 for men and 95 for women as an assumption for calculations.



5. Overestimating returns. The new rate is 6-7%.



6. Failing to make a retirement budget. People aren't realistic in estimating retirement living expenses, especially with respect to health care costs.

Overall, I thought this was a good list. In our case, we've been able to avoid making these mistakes. Based on our experience, I would add three other mistakes to avoid.

1. Not contributing up to the maximum 401K employer match. Whatever an employer matches is free extra money.



2. Not learning to live below one's means while working. While working we saved 20% of our income. As a result, we didn't need our full income to cover retirement living expenses which made the transition easier.



3. Having major debt. When retired, we only had mortgage debt. In our second year of retirement, we paid off the mortgage and significantly reduced our living expenses which enabled us to remain in retirement in spite of the decline of the stock market and the recession.

For more on Reaping the Rewards, check back every Saturday for a new segment.list

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Declining Financial Skills May Indicate Other Health Problems

Money Woes Can Be Early Clue to Alzheimer’s reports how significantly declining skills can sometimes indicate more serious mental capacity issues. The article shares how previously competent people start making serious financial mistakes long before others realize there is a health problem. Unfortunately, the issue is often missed because one spouse handles most of the financial transactions.

In our family, we try avoid the situation of one spouse handling most of the financial matters. We split up the financial responsibilities in a way such that there is a natural check and balance. My spouse pays the bills and handles the statements from our bank and investment accounts. I manage the investment accounts and fund the checking account from which bills are paid. In addition, we have hired a financial advisor who we trust to help us should one or both of us become unable to handle our finances. If one spouse is having an issue, the other spouse should be aware of the problem fairly early.

Hopefully, we will not need much assistance in handling our families finances in the future. However, if an issue should arise, I expect we will be able to identify before it becomes a major problem.

For more on Crossing Generations , check back every Thursday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Timeless Articles from the Archives #14

It's been over four years since I started My Wealth Builder. As I think about topics to write , I often remember, "I've written about that before," and decide to find a new topic. However, since many principles of personal finance are timeless, I want to include them in a recent post on My Wealth Builder. Therefore, I have started a series called "Timeless Articles from the Archives" that will highlight posts from the same week in 2006-2009.

2007

Inexpensive Fall Activities With Our Three Year Old- Here are some low cost ideas we have done.

Our Journey To Financial Freedom #7 - How Luck Played A Role - The seventh in the financial freedom series.

2008

Procrastination has Saved Us Money - Sometimes delaying a purchase has saved us money.

Stocks - Is it Time to Buy or Sell? - It depend on whether I have enough cash for near term expenses.

Financial Lessons from my Parents' Generation Re-Learned - My parent's financial principles still apply today.

Retiring Early in Turbulent Times - In hindsight, here's what worked, what didn't work, and what I wish I had done.

2009

A Bubble is Coming - The bond bubble came, I profited, and it still hasn't burst.

How Tracking Net Worth can be Misleading - Here's why I think money saved is a better measure for retirement readiness.


To me, the content of these posts are still relevant today and were worth reading again.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial, investing, career, parenting or saving advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Links to Carnivals from November 9 - 15, 2010

Here are the links to the Carnivals in which My Wealth Builder participated from November 9 - 15, 2010:

The Wealth Builder Carnival #14

Carnival of Financial Planning #165

Baby Boomers Blog Carnival #65

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial or wealth building advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

The Wealth Builder Carnival #15

Welcome to fifteenth edition of The Wealth Builder Carnival. The purpose of this carnival is to collect articles from the blogosphere on building, preserving and keeping enough wealth for a comfortable retirement. For reference, I have tried to keep the carnival content tightly focused on wealth building and did not include submissions that were off topic.

For reading convenience, I have listed the posts with brief summaries by the authors and organized them into seven categories: Earning, Investing, Insuring and Protecting, Living Frugally, Retiring, Saving and Taxes.

And now onto the Carnival:

Earning

Creating Passive Income on the Side - "Stop trading hours for dollars. Focus instead on creating passive income on the side. Consider niche content websites, or engage in other side gigging that generate residual income on auto pilot. Passive income streams can be established in pretty much any profession or discipline."

Insuring and Protecting

Book Review & Interview with Jonathan Spall of How to Profit in Gold -"The book lends itself more to be a manual or handbook of the way gold trades and the factors that affect its price. If that enthuses you, check it out. "

Investing

What Are Good Investments For Your Retirement - "Retirement planning is something to start early and adjust as you near retirement age."

16 Dividend Stocks Delivering What?s Important - "In the southern U.S. where I live, there has been some controversy over harvesting forests of hardwoods and reseeding them with pines. Growing hardwoods is very similar to investing in dividend stocks. What you plant or invest in today will not yield much for years to come. That is not to say progress is not seen. It is just slow and deliberate."

Buying Fixed Immediate Annuities - "Tips on shopping for a fixed immediate annuity for investors in or nearing retirement."

Four Ways to Get Your Feet Wet With Investing - "If you're not sure how to get started investing, we look at some simple ways to get your feet wet."

10 Tips For Buying a Rental Property - "While by no means a passive investment, if you’re up to the challenge, residential rental property ownership can provide not just additional short- and long-term income, but tax benefits as well."

Relative vs absolute performance: The dangers of going down the relative performance wormhole (part I) Blog Spotlight - " To be a successful investor, don’t be distracted by the smoke and mirrors of 'outperformance.'"

Living Frugally

Frugal Holiday Traditions to Introduce in Your Family - "Here are some great frugal traditions you can start with your family!"

Mistakes With Coupons Clip Into Your Savings - "This is why I don't use coupons--besides, I learned a BETTER way to shop!"

Saving Money by Managing It - "Here are some tips to help get you on your way to better money management."

Making the Most of Your Credit Card Overseas - "There are a number of reasons why a credit card makes a great addition on a trip to a foreign country, but there are a few guidelines to follow before venturing overseas."

4 Things You Shouldn't Pay For -"In order to save myself some money I asked myself, what do I pay for that I shouldn’t be? "

Christmas Gift Ideas Under $25 - "A huge list of unique Christmas gift ideas under $25, perfect for a more frugal Christmas."

Budgeting Tips for Couples - "The days where your biggest decision as a couple was what movie you were going to watch are over. Now, you are taking a new step as partners – perhaps you have recently moved in together, or are considering starting a family."

Personal Finance Starts With Accounting! - "Without appropriate accounting, it's challenging to improve your finances. Accounting is how you gather analytics for your finance."

Tips and Advice on How To Dispute An Erroneous Charge - "How to dispute erroneous charges on your credit card."

Retiring

Planning To Roll Over Your 401K To A Rollover IRA? - "Discussion on 401k rollovers and rollover IRAs."

Saving

High Yield Savings Account Offers - "Here is my list of some of the top paying online savings account offers."

An Against the Grain Approach to Prioritizing Your Savings -"Before we can start thinking about the future we need to make sure our present finances are taken care of."

Taxes

Opportunity to Pay Zero Federal Income Tax in 2010 - "The child tax credit, making work pay credit and saver's credit may reduce our federal income tax to zero in 2010."

That concludes this edition. Submit your blog article to the next edition of The Wealth Builder Carnival using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: the wealth builder carnival, blog carnival.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, earning, insuring, investing, living, retiring, saving, tax, or wealth building advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

How to Buy Low and Sell High

With the current volatility in the market, it seems that there is opportunity to exercise some market timing. However, the perennial question is how and when. How to Play a Market Rally in The Wall Street Journal offers two ways to execute buy low and sell high strategies.

Market advance/decline - For this strategy, the investor sells 10% of his equities whenever the market rises 20%. When the market falls 10%, the investor would use 20% of his cash to buy equities. This strategy would have returned 14% from December 24, 1998 to November 11, 2010. A buy and hold strategy in the S&P was flat during the same period.

Stock market capitalization/GDP ratio - For this strategy, the investor sells 10% of his equities whenever the the ratio of stock market capitalization to GDP is above 115%. When the ratio is below 75%, the investor would buy equities using 20% of his cash. This strategy would have returned 36.5% from December 24, 1998 to November 11, 2010. A buy and hold strategy in the S&P was flat during the same period.

Data for market advances and declines are easy to find. I was unable to find any current information for the stock market capitalization/GDP ratio after a brief Internet search. For now, I expect the stock market to continue being choppy with multiple advances and decliens. Therefore, I will try the first strategy as a way to do more disciplined buying and selling of the equity positions in our retirement savings accounts.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Indivdual Investors Too Bullish?

Historically, individual investor bullishness is a contrarian indicator that signals a stock market peak.

According American Association of Individual Investors survey for the week ending November 10, 2010, the percentage of investors who think the market will rise in the next six months has reached 57.6%. This is the highest percentage of bulls since January 2007. In addition, The Wall Street Journal has reported in 'Dumb Money' Returns to Stocks that $8.4 billion has flowed into equity funds since early September with $2 billion coming from individual investors.

Overall, I don't agree with the $2 billion being significant since $162 billion was taken out of equity funds from January 2009 to August 2010. So it doesn't appear the retail investor has returned to the market yet even though 56.7% are bullish. However, institutional investors may still react the retail investor indicator and I will be prepared for a possible correction in the next few weeks.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Thinking About 2011

Since retiring in our forties in 2007, each year has been a test of whether we had saved enough for retirement. Our retirement accounts declined significantly in 2008, bottomed in 2009, and 2010 has been a seesaw recovery that is on the upside at the moment. For now, our retirement savings are still sufficient. However, I expect 2011 will continue to test our ability to stay in early retirement.

If the stock market should advance, our early retirement will be sustainable for another year. A return of 8-10% in our retirement portfolio is a level I would consider a comfortable confirmation. This could be achieved by either a 10% return in my company stock or a 10% overall return in the market. Both of these outcomes are possible given that the third year of a presidential term is typically the best year for the stock market with the S&P averaging +21.7% since 1933 and the Dow averaging +24.7% since 1945.

If the stock market should decline, I want to avoid my big mistake of 2008 of staying invested. This time, I plan to cash out a significant portion of our managed accounts if they should drop over 5%. In anticipation of occurs for an extended period. While I don't expect to make money during a market fall, I hope to mitigate the losses by being in cash and shorting some stocks.

At this point, I believe the President and Congress will begin taking the necessary steps to accelerate the economic recovery leading to a rise in the stock market. However, I am also prepared to be disappointed.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC