I've now been actively trading for a full year. It's been quite profitable, but the results have varied from month to month. Overall, return has been 25.31% for the year, which is good by most anyone's standards. I'd be most happy if I can replicate this every year.
When I first started this exercise, it was my hope to replace my salary using my trading activity. I didn't do this, but it didn't work out to be necesary as I was working full time during most of the year. And the period when I was trading full time were the months where my return was by far the greatest.
Specific metrics are presented below.
It was a fairly good month. OK yield (7.24% on turnover, 1.8% on available funds). Ok realized gain (6th highest in 12 months). But I'm underwater on my outstanding holdings with 3 of five holding in the red and the other two are barely in the black.
I sold the following:
- National Grid PLC
- Public Service Enterprise Group, Inc.
- FPL Group
I currently hold the following:
- Exxon Mobil - Up 1.4%
- Exelon Corp - Down 3.2%
- FirstEnergy Corp - Up 0.1% - bought in additional shares during the month
- Telecomunicacoes de Sao Paulo - Down 2.5% - New holding
- Telecommunications Systems - Down 3.1% - Tiny holding. Was up 14% earlier this week, but dropped dramatically after earning call.
No dividends were collected, but Exxon, Excelon and FirstEnergy are due to go ex-dividend in the next two weeks.
The past week or so has brought to light some interesting Telecom plays. I thought the appearance of these buying opportunities brought to light of the diversity of approaches to this sector. I also found it odd that they all hit at the same time as these seem to be driven by somewhat unrelated and company-specific circumstances.
First is Telecomunicacoes de Sao Paulo which is a landline/internet/TV provider in Brazil. This is an annual dividend payer who has already paid the for the year and had a 20% price drop in the last month. While this is riskier than my usual purchase, I bought in at my buy price and doubled up once the price dropped another dollar. It's now up from its' 52 week low (induced by recent yearly dividend payout), but I'm still in the red. Nonetheless, I'm pretty happy with this holding because it was acquired at a good price and is a longstanding company. But if I have to hold it until the next dividend payout, I’m sure I will change my tune. This might be a good lesson in buying stocks that pay dividends on yearly schedules.
Next is Telecommunications Systems. They provide services for the wireless industry and do not pay a dividend.. I’ve had past success trading this stock, so it is one of the rare exceptions to my rules about trading growth stocks. They have also had a recent swoon in their stock price to 10 month lows. I bought a small lot with an expectation that the earnings call next week could send the prices up or down. If it goes up, I’ll sell out for a good profit as the trading range is quite broad. If the call send the price downward, I’ll probably load up. Recent news has been reasonably good indicating a good revenue stream on the horizon even if they had a bad first quarter.
Finally, there’s Nokia, the Finnish wireless handset provider. They took a huge 13% plunge today as they had bad news on multiple fronts. This one was very tempting. The price was actually down even further early in the day and well below my buy price. Also, I’ve traded Nokia in the past and have made my desired profit. But I just couldn’t pull the trigger despite the attractive price. This one smells too much like a Nortel at the moment and would not allow me to sleep at night. Also it's another international stock that's an annual dividend player and I don't think I have the constitution for more than one of those at a time.
I find these decisions to be a strong test of my trading strategy. Of these three stocks, Nokia is the only household name and it’s the only stock that I choose not to buy. I hope to be able to look back at this in a few months and say I made the right calls.
Well, I’ve spent all my time documenting my trading strategy, but I’ve spent no time talking about the way that this fits within my overall plan.
In fact, the funds I use for active trading represent about 10-15% of my overall portfolio. I’m very conservative at heart and despite my efforts to minimize risk, I acknowledge that active trading is an inherently risky activity. So it’s important to me that this only be a small part of my overall holdings.
Basically, I split my holdings into two pieces, tax sheltered and taxable. I spend the majority of my time actively managing the tax sheltered funds as they give me the most benefit with the least headaches.
Tax Sheltered
After ensuring I can meet my daily obligations, I make every effort to maximize the moneys in the tax sheltered accounts. So I try to take full advantage of contributions to IRA’s and 401(k)’s where possible. I’m opportunistic with my approach to the Roth instruments. If eligible to make contributions, I do. However, I have not converted any traditional account to Roth and I don’t intend to unless this become more attractive.
There are three basic tax sheltered holdings:
401(k)’s (20-25%) - These are the primary instruments for collection of new funds. My wife and I both have these accounts with the usual limited mutual fund offerings. I focus on capital preservation in these accounts with most of the dollars being directed to bond or governmental funds. I see these as a temporary holding place. My goal is to get these funds rolled over into another account that I can manage. This works well for me, as I typically change jobs ever few years and can roll-the account over. This is less of an option for my wife. However, I’m considering an “in-place rollover” which appears to be an option for some funds.
IRA CDs - (50-60%) - These are mostly long term (8-20 year) callable CDs where the interest is collected and not retained in the CD. The are held within my brokerage account and the collected interest is either used for new CDs or swept into my trading funds. I also hold some traditional CDs, but these are being rolled over into my brokerage account as they mature.
IRA Trading (20-25%) - These are the “available funds” that are the primary focus of this blog.
My plan is to defer withdrawal of these tax sheltered funds as long as possible, so you’ll see that my taxable strategy is intended to compliment this with high liquidity.
Taxable
These funds are those necesary to support our lifestyle up to the time that we are able to collect pensions, social security or withdraw funds from the tax sheltered accounts without penalty.
Taxable funds are also split into three different groupings:
CD Ladder (60%) - This is a ladder of approximately 20 CDs that are spaced in 3 month intervals over 5 years. I currently have all interest reinvested into the CDs, but I plan to change this upon retirement and use the interest as spending money. If additional cash is required, I have no qualms about drawing down the principal on maturing CDs rather than touching the tax sheltered funds.
Equity (30%) - These are a few income stocks that I’ve held in the long term. These are not diversified, but are conservative holdings and represent a small enough percentage of the portfolio that it doesn’t keep me awake at night. I use the dividends for funding the CD ladder, so the equity percentage should decrease over time unless the stock prices keep pace.
Liquid funds (10%) - These are held in money market funds and vary quite a bit depending on where I am cashing in or buying CDs. Significant expenses can also cause variations in these liquid funds.
Obviously, my taxable strategy has one glaring omission. You’ll note that I don’t undertake any activity to take advantage of the lower tax rate associated with capital gains. Being the cheap bastard that I am, I struggle with this on an ongoing basis. And in fact, I occasionally use liquid cash for this purpose. But I do not do this as a rule because it introduces additional risk into the overall portfolio and also adds extra overhead into record-keeping and tax reporting that is not required for my tax sheltered trading.
For most if not all of 2010, I've had at least one stock that has been underwater (especially EXC). Today is the first day that I can remember that all my holdings are in the black. I still have some lots in negative territory, but in net, each stock has a gain. Perhaps more importantly, overall unrealized gain is at 1.5% and two of the holdings are sitting at about 6% gain, so they will soon (hopefully) be tuned over.
This seems to be related to the recent run-up in oil prices. I hope it lasts a little longer, even though it’s having an impact at the gas pump too.
