Hello again! I hope everyone is having a terrific start to their CHRISTmas season. This time of year can be stressful to say the least, so my encouragement for you today is to simply count your blessings! Name them one by one, as we’ve heard before. Remember that above all that stress is a God who is carefully weaving a plan to prosper you and not to harm you. Therefore, take heart, no matter what turmoil may come, it will pass!
With that, I wanted to describe briefly what I’m doing in my TastyTrade account to protect my entire portfolio. We just never know when this insane market will turn over so we have to stay ready.
If you’re new to the investment space, the information below should offer you a relatively inexpensive option to consider as you prepare to protect your own investments. As a primer before we jump into my portfolio protection plan, here is a post from Investopedia.com; Portfolio Insurance: What it is, How it works. This should help get you thinking in the right direction as you consider the importance of such a task.
Post Agenda
Insurance: Does it Help?
Insurance, ugh… what a nerve-wrecking thought, right? Honestly, I can’t stand the insurance industry. Just frustrating that when you sign up they tell you everything is covered, only to find out later that nothing really is.
In any case, I’ll get off my soapbox about insurance. Instead, let’s turn our attention to thinking like these, in my opinion, legal crooks.
First, we have to understand our goal and the options at our disposal to accomplish that goal. Truthfully, I think it could be summed up as simply this; reverse investing. We want to take advantage of any opportunity that benefits from a falling market.
I can assure you now, stonks definitely don’t always go up. At some point, the masses are going to withdraw from the market, abruptly. Sure, that may be years from now, but it will happen and when it does, this is one insurance policy you’ll be glad to have. Additionally, you won’t be met with the all to common, “I’m sorry, your policy, per exclusion Z, article 3.7, isn’t covered”. Instead, you’ll receive the full benefit, at a time when it seems everything is crashing down around you. That’s what I believe insurance is suppose to do.
So, to answer the question, in this instance, having a portfolio protection plan will most certainly help. However, without an actual plan, it may just be years of wasted premiums and a drag on portfolio return. This isn’t something I wanted either and in the next section I’ll describe exactly what my portfolio protection plan looks like and why you may consider one as well.
My Portfolio Protection Plan
A few months ago, prior to the election, I wrote a post: “Free Market Crash Protection Strategy”. In it, I discussed what I was planning to do to finance my portfolio protection plan. I ultimately decided against that approach because I just couldn’t accept holding a short put into the teeth of a major market decline.
While losses are still possible with this plan, I think it better aligns with my investment philosophy as a whole. That is, I like each individual portfolio I own to accomplish several goals simultaneously. I want an asset that will grow, an asset that is either conservative in nature or that offers a modest hedge, and I want an income. This plan accomplishes that task. However, the major consideration here was income. I needed an above average way to generate cash to buy my protection.
Here is my portfolio at TastyTrade, as it stands today.
You can see the assets I ultimately decided on, at least for now. That could, of course change as I monitor the performance but I do think it meets my criteria. Below is a closer look at my thought process surrounding each investment.
/MESH5 Long Puts
/MES is the portfolio protection piece to every dollar I have invested. That holding alone is the entire purpose of this post and this account.
The micro futures offer me the most bang for my buck. By buying deep OTM puts I receive crash protection at the cheapest possible cost. That doesn’t mean I receive immediate insurance though, at least not enough to cover my portfolio through a normal bearish decline. By buying puts this far out of the money, I receive a comparatively small benefit. Puts closer to the money would be required in that case.
What this does do though is provide protection from a scenario like Covid or 1987’s, “Black Monday”.
Currently, I hold 2 puts at a strike price of $3950. No where near the money, I know, but even a decline to $5000 would offer a few thousand dollar respite if disaster does strike. Any further loss would see my protection accelerate exponentially from there.
Lastly, my goal here is to hold as many OTM puts as I can reasonably afford while also balancing the financing arm of this account. I’ll have to carefully consider price erosion of the other assets against the desire to buy more puts. Ultimately creating a rather complex equation.
That is, how can I keep the account from eroding in value while holding as many puts as possible? But also average down my cost basis on other assets and increase my income over time.
SPYD – Modest Growth with Income
SPYD or the S&P 500 High Dividend ETF is the only “growth driver” in this account, if we want to call it that. The investment is really more focused on high dividend payers than it is outright growth. However, many of the assets in this ETF are stalworth companies that do grow, maybe just slower than something like a technology focused asset.
This offers a couple of benefits from my perspective. It minimizes volatility from the largest holding in the account while also offering the income I need to buy more puts.
With this holding my primary objective is to drag the portfolio slowly higher. As the S&P climbs, my hope is so too will this investment and offset any declines from the income focused branches.
SPYT – Potential Growth but Consistent Income
SPYT or S&P 500 Income Target ETF is my attempt at stable income. The other income generators below are sporadic at best in terms of how much income they’ll provide. With SPYT their primary focus is on returning 20% as income by any means necessary.
However, this could lead to stability problems with regard to the initial investment. Ideally, I’d like to watch SPYT continue a slow march higher while also throwing off that 20% in income but given the newness of this asset performance is quite unknown. Over time I may watch this investment suffer more than its worth to hold.
If that happens, there wouldn’t be any reason to continue holding this one. Instead, I will likely just contribute more to the other three assets in this account. If however, SPYT can hold steady from a capital appreciation angle then this will be considered a real winner. I will have benefitted from the higher income percentage and my initial investment will have remained intact.
YMAX & YMAG – Income, Income, Income
YMAX & YMAG are billed as “fund of funds” to create an illusion of diversity but I’m just not entirely sure about that. These funds spin off copious amounts of cash and in my opinion shouldn’t be used for anything more. That said, I did drink some of the kool-aid though, otherwise I would just invest into something like TSLY and return over 100% in income per year.
These investments, hopefully, offer me a small taste of that higher income without the deafening erosion to net asset value. By combining every Yieldmax ETF into these investments I hope to achieve a more stable share price with a well above average income.
To say it another way, my real goal with these assets are to create an infinite income loop. Eventually, I’d like to return every dollar invested back into my bank account but also have the shares to continue creating income. If I’m successful then my portfolio protection plan and this account will continue perpetually without me having to make recurring contributions. The jury is definitely still out on whether that’s possible.
My Portfolio Protection Plan Assumptions
As you can see from the previous section, I’m making some assumptions as to what may be possible in the days ahead. As we all know, even the best laid plans can fail. That’s why I advocate for Jesus over anything else. He will never fail and that’s an insurance policy I trust.
However, these are the biggest assumptions as I see them.
Protection from Long Puts
I’m assuming if the market tanks, these puts will skyrocket in value. Part of that assumption is that volatility will also explode. That could prove problematic if the market declines but volatility stays relatively muted. We just watched the market retrace a considerable clip in 2022 without much volatility noise. In that instance, the protection here would also suffer. My overall portfolio would fall but I wouldn’t be receiving much hedging power from these puts. For this insurance to actually kick in I would need price to fall and volatility to rise. The more of each, the better protection benefit I’ll receive.
Consistent Income
The next big assumption I’m making is that I’ll be able to consistently generate enough income to sustain purchasing long puts. If volatility rises, long puts will also rise in price. If I don’t have enough income to cover that cost increase, I’ll be forced to pay for the puts myself. This would create yet another downward drag to my overall portfolio. A direct contradiction to the entire purpose of this account.
Don’t forget, I’m also trying to balance several other items in this account. So really, my income would have to remain intact enough to cover the total account value as well as the protective puts. A very big assumption indeed.
Growth or Return of Capital
The last big assumption I’m making is that this plan will create a portfolio that can grow over time without additional contributions and that any overages can be returned to my bank account. That’s asking a whole lot from these assets. As I’ve mentioned, hopefully SPYD, and to a lesser degree SPYT, can sort of drag the net value of this account higher. However, if the market does decline, these will also decline. Thus, if the long puts don’t return enough to cover that and much more then this entire portfolio is really just an elaborate waste of time.
Final Thoughts
With that, I think I’ll close. Hopefully, in the sections above I was able to highlight my portfolio protection plan sufficiently enough for you to consider a protection plan of your own. Honestly, it’s taken me weeks to finally decide how I wanted to approach this side of my investments.
Ideally, I’d want a few things to happen for this to be considered a resounding success; I want the total account value to increase. I want the income to buy as many puts as possible. I want to slowly siphon off excess capital back into my bank account. I guess in the weeks or months ahead we’ll see if any of that becomes a reality.
Until the next post.
God bless,
Jeff
