I have a problem with my portfolio. I made too much money too quickly this year. It sounds like a nice problem to have – but hear me out…
There have been many years when I wish I had had this thorn in my side. In my 35 years in the markets, I have not always been so lucky. No one is.
Here’s how my problem developed…
About 10 years ago, I started shifting gears in a big way from the gunslinger and speculator philosophy of falling in love with great stock ideas to something more befitting my age.
If the truth be known, as the years piled on and retirement got closer, fear forced me to become more realistic and conservative.
Add to the mix the fact that I have been a staunch contrarian for decades. So when the market fell apart last December, it was truly Christmas.
On the last trading day of December, I plowed every penny I had in cash into exactly the kind of investments I have been recommending for years: blue chip, large cap, rock-solid and cheap companies with excellent fundamentals. And there were a lot of cheap stocks by the end of December.
As with all my holdings, I bought all of them with at least a five- to 10-year time horizon. None of them were growth monsters, and by all rights I should have earned about 3% to 5% per year plus dividends.
But I now find myself in a situation where half of the portfolio I put together last December has run up between 20% and 40%. In fact, I have only two positions out of 40 that are down slightly.
(I know – this is a problem everybody wishes they had.)
But here’s where my age and my proximity to retirement come into play…
It’s all part of my macro retirement plan, at least the stock side of it, to accumulate great companies with solid fundamentals and long-term growth prospects that have been growing their dividends.
I buy these companies only when they are down in price enough that they pay somewhere around a 4% dividend.
(That’s the contrarian in me. I know the market will always tank and there will always be buying opportunities. It’s just a matter of patience.)
That should have paid me a long-term total return of 7% to as high as 9% per year.
My thinking is also to hold these positions for a long time to give me the opportunity to dollar-cost average and increase my positions during weak periods and ride the long-term upward trend of the market.
Either works for me. And while I’m waiting for the market to act like a market, the dividends can supplement my retirement income.
It’s not brain surgery, I know. But for a person my age, it makes a lot of sense and it’s easy to manage.
But I find myself in the position where I already have five to 10 years of growth in a little over 10 months.
Members who follow me in my Oxford Bond Advantage know that one of my favorite things to do is to “take the money and run.” My rationale has always been that I’ve watched too much of it go down the toilet when I haven’t.
But the problem now is that thinking runs contrary to my macro plan of riding out the ups and downs of the market and banking on the long-term upward trend.
And I have learned the hard way that the long term is where the big money is really made.
The situation is further complicated by the fact that some of the big gains are in a taxable account. And I’m not giving 20% to Uncle Sam without a fight.
So, as I have advised people to do for decades, I sought the advice of my accountant and a couple of acquaintances in the business who I consider real pros.
And here’s what we came up with…
In my tax-deferred accounts, I’m going to take my profits.
That guarantees me anywhere from about four to seven years of growth. But I’m only doing this with the idea that when the market dips again – which I know it will – I will reenter these positions or similar ones.
Do I risk losing some growth if the market continues to run higher? Yes! But at this point in my life, I am much more concerned with what I have than what I could have.
In my taxable accounts, I’m selling covered calls a few clicks above my stocks’ current market prices.
If my stock is called away, I’ll make more than what the stock is worth now. If not, I’ll keep the premium.
The keys to my success in both scenarios: patience and market wisdom.
I’ll need the patience to wait out the market and the wisdom, based on decades of experience (not all necessarily good), that it will sell off and then recover.
Again, it’s not brain surgery – but it’s oh, so tough to implement.
The moral of the story: Buy cheap stocks in great companies and leave them alone… until you have a year like this one.