Overall Financial Strategy

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.

All the way back

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.

March 2010 Trading

It's been a while, but finally a good month! Good realized gain, good dividends, decent turnover and I'm still invested at about 70% in some good positions with decent upsides (although I have a small unrealized loss at this writing). I earned 12.5% on the turned-over funds and 3.64% on all available funds. I'd characterize this as my third best month to date.

I sold the following:

• Lockheed Martin Corp - I held some of these shares over 6 months, but this was by far the biggest contributor to realized gain for the month.
• Marathon Oil Corp - Small holding, but turned over fairly quickly at a nice gain.

I currently hold the following:

• Exxon Mobil - Up 0.2% - Up and down, but no serious opportunities to sell yet.
• FPL Group - Down 0.9% - Still in negative territory, but way up from recent lows and moving in the right direction.
• Exelon Corp - Down 2.7% - I don't think this was in the black all month, but up from lows as well
• FirstEnergy Corp - Up 0.9% - Small holding.
• National Grid PLC - Up 3.6% - Small holding bought at an attractive price. Div paid semi-annually, so this represents a deviation from typical purchase. But goes ex-div in about 3 months.
• Public Service Enterprise Group, Inc. - Up 0.6% - Another small holding at a good price. I've held this in the past too.

I collected dividends on the following:

• Marathon Oil Corp
• Exxon Mobil
• Exelon Corp
• Lockheed Martin Corp

Back in Black!

March is starting out like a lion.  I was able to sell my LMT position after the stock going ex-div and all holdings are up from their February positions.  I already have my best realized gains since July and another stock (MRO) is approaching the sell price.  So there is a chance of the best month to date if trends continue. 

Further good news is that many of the realized gains from the LMT sales are associated with our Roth IRAs.  And these gains are not subject to tax, ever.  So maximizing gains in these accounts is a very good thing.  If fact, these accounts are up 39% and 53% since May '09.  These are higher than the gains in the other accounts, but that was the plan.  What makes these gains even more surprising to me is the fact that the LMT holdings took 6 months to turn over and I've only been using this strategy for 10 months..

And if things turn south again, I'm now only 68% invested, so their are funds available for reinvestment.  I'd like to clear the books a bit more before buying back in, but you take what the market offers.

February 2010 Trading

Another slow month for realized gains.  I only sold one holding for minimal gain, but I was able to invest 100% of my funds as the market stayed depressed.  If not for an injection of new funds from a transferred IRA, I would be 100% invested right now. 

 As indicated, I had my second slowest month ever for realized gains and I only earned 7.3% on those.  I'm also marginally in the red for unrealized gains related to the current holdings.  But I went ex-div on 5 of 6 holdings, so March will be my biggest dividend month to date.

I sold the following:

• Owens and Minor, Inc - This is the second time I've cycled through this stock. 

I currently hold the following: 

• Lockheed Martin Corp - Up 6.3% - I've now held some of these shares for 6 months and will be collecting the 2nd round of dividends on them.  I'm tempted to cash in because the gains are reasonable, but I still like the topside on this.
• Exxon Mobil - Down 2.8% - I've been in the black on XOM several times since I've held this, but the gains have always been modest.
• FPL Group - Down 4.9% - This has been depressed since news of their rate case going south.  But it's still a sound company, so I hope to see a bounce back in time.
• Exelon Corp - Down 3.8% - Another depressed utility holding company with sound numbers, but I might bail out with modest gains.
• Marathon Oil Corp - Up 3.6% - Small holding bought at a nice discount.
• FirstEnergy Corp - Down 0.3% - Another small holding purchased at an attractive price, but it's had some bad news lately keeping the price down.

No dividends were collected this month, but I'll be collecting dividends for all stocks except FirstEnergy in March.  March income is already assured to be 250% of the paltry take for February.  With a few sales, it could very easily be a big month.  We'll see what the market has to offer!