Although bond yields have been climbing, many investors and
retirees aren't getting adequate cash flow from their
A New York Times article titled, "Why Many Retirees Could
Outlive a $1 Million Nest Eggs" said:
"For people close to retirement, the problem is acute. The
conventional financial advice is that the older you get, the more
you should put into bonds, which are widely considered safer than
stocks. But consider this bleak picture: A typical 65-year-old
couple with $1 million in tax-free municipal bonds want to
retire. They plan to withdraw 4% of their savings a year - a
common, rule-of-thumb drawdown. But under current conditions, if
they spend that $40,000 a year, adjusted for inflation, there is
a 72 percent probability that they will run through their bond
portfolio before they die."
The 100% Bond Portfolio
The traditional view of investing in Treasury bonds (NYSEARCA:TLT)
is they are "risk free." But with the possibility of a debt default
by the U.S. government and the threat of higher interest rates
damaging the value of bonds further, many people are learning the
Treasury market has plenty of potholes.
The 10-year U.S. Treasury yield (NYSEARCA:IEF) surged more
than 50% over the past year, but the yield is still just at 2.62%.
That means someone with a 4% withdrawal rate on their investments
is eroding their principal.
The 100% Stock Portfolio
Some investors are betting everything they own on the stock market.
This is the opposite extreme of the 100% bond portfolio example
cited above. The theory behind this strategy is that since stocks
have easily outperformed bonds over long-periods of time (25 years
or longer), an all-stock portfolio will solve everything. (The Wall
Street Journal recently ran a piece titled, "The 100% Stock
On paper, the 100% stock portfolio may look good. But in the
real world, market declines of 40%-60% as we've experienced in our
life-time (see 2000-02 and 2008-09) can permanently disrupt even
the best of investment plans. And that's why a 100% stock portfolio
is probably best geared for those who 1) can afford very large
drawdowns, and 2) who don't mind large swings in market
A Better Strategy
A less extreme approach is what our
Income Mix Portfolio
does. Each month we sell covered calls on ETFs that track a few
different asset classes; stocks (NYSEARCA:DIA), gold
(NYSEARCA:GLD), and U.S. real estate investment trusts
By using this technique, not only are we able to collect
dividends from the underlying ETFs, but we also generate income
from the options. And in the case of gold, we are able to convert a
dead asset that generates no dividends, into an incoming producing
asset! Over the one-year period ending September 2013,
our Income Mix Portfolio has generated $10,900 or $908 per month,
based upon a $100,000 all-ETF portfolio. Each month we tell readers
the best combination of ETF covered call options to sell.
One final strategy for solving the income shortage puzzle, is to
sell out of the money call and put options. This is definately a
less conservative strategy compared to selling covered calls
because you don't own the underlying ETFs. However, properly placed
trades often result in call and put options that expire completely
worthless, which is what we want.
Below is a recent example of a GLD income trade we did. Our May
on GLD options said the following:
"After meandering in the mid-teens over the past five months,
gold volatility (^GVZ) has jumped to over 20. That's translated
into higher call option premiums for the SPDR Gold Shares (
). We like selling the GLD May 2013 143 call options
(GLD130524C00143000) for around $200 of monthly income. These
options expire on May 23, 2013 and our goal will be to watch them
expire worthless. Although GLD has rallied hard since its swoon
toward $130, the YTD price trend is still down."
How did our GLD income trade work out?
Just as we expected, our GLD May 2013 143 call options expired
worthless and we bagged the monthly income.
Although selling covered calls putsa collar or limit on any
potential capital gains, the monthly cash flow we get helps us to
achieve our primary investment objective: More income with less
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