Need opinions about my broker's strategy

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Need opinions about my broker's strategy

Postby matonplayer » Wed May 22, 2013 11:17 pm

Hi, newbie here. I've been a reader of the forums for a while but have never posted before. Anyway, I was hoping you could offer some independent opinions on my broker's strategy. Last year I came into possession of a seven figure sum which i plan to use as my retirement nest egg, hoping to last 40 years. At the advice of a friend at church who works in the financial industry, I signed up with a broker/adviser who works at one of the large brokerage firms. His strategy is somewhat out of the ordinary - he's had me in 50% cash for almost a year, as he expects a significant market correction. In the meantime, we generate income by selling both naked puts and covered calls. His expertise is supposedly in options strategies - he claims that the goal isn't to make the portfolio last, but to generate more than enough income from the nest egg to live on. He claims that he uses the same strategies for both his own and his children's portfolios, and I have no reason to doubt him.

That said, it's difficult watching the market go up and up while the value of my portfolio goes sideways, primarily because I've been assigned to buy stock which then subsequently goes further south.

Any opinions/ideas/suggestions?

Thanks

Stan
Last edited by matonplayer on Sat May 25, 2013 11:01 pm, edited 1 time in total.
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Re: Need opinions about my broker's strategy

Postby bottlecap » Thu May 23, 2013 12:15 am

Yes, can him. You need to educate yourself (welcome to the best place on earth to do that) and, if you still need one, seek a financial advisor. A broker is little more than a salesman. His strategy is a fool's errand. No one knows when the market will correct, but in the meantime, you need a plan, not a broker.

Good luck,

JT
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Re: Need opinions about my broker's strategy

Postby rmelvey » Thu May 23, 2013 12:31 am

Step 1: Fire your broker.

Step 2: Take all of your money and buy a one year TIP.

Step 3: Take that entire year to learn about asset allocation. Try to stick with authors that focus on index funds. Your portfolio is large enough where the effort will have an extremely high hourly wage. Plus learning about how the capital markets work is fun.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 8:05 am

Thanks for the advice so far. I'm pretty familiar with index funds / passive investing. It's the strategy I've used for years in my IRA account. For some reason I guess I thought I needed something "different" for my windfall.

Can we eliminate a variable? If we put aside the broker's motivations, is there a chance the options selling strategy is a viable one?

Thanks again,

Stan
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Re: Need opinions about my broker's strategy

Postby Scooter57 » Thu May 23, 2013 8:11 am

Stan,

The options strategy is likely to be generating commissions for your broker while eroding your capital. It's a a losers game. Depending on how he is doing it, it could cost you a lot of money or just a small amount of money. The chances of it earning you a lot of money are slim.
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Re: Need opinions about my broker's strategy

Postby matjen » Thu May 23, 2013 8:22 am

matonplayer wrote:His expertise is supposedly in options strategies - he claims that the goal isn't to make the portfolio last, but to generate more than enough income from the nest egg to live on. He claims that he uses the same strategies for both his own and his children's portfolios, and I have no reason to doubt him.


Reasons to doubt him:

1) The academic research that almost universally agrees that very few are able to consistently beat the market
2) Or, to be more direct, if he has a strategy that can provide that type of income then why does he need your money? At this stage of his life perhaps he should be able to just trade his own account. Why put up with clients and business development and paperwork, etc. I will admit this argument is a bit more persuasive if the broker is in his 50s say.
A man is rich in proportion to the number of things he can afford to let alone.
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Re: Need opinions about my broker's strategy

Postby staythecourse » Thu May 23, 2013 8:56 am

Congrats on the windfall.

The more about investing I learn the more I realize Mr. Bogle had it spot on when he said "you get what you don't pay for" when it comes to investing.

Just like anything else in life knowledge is power. In this age we live in there is no execuses.

Some books I would read:
1. Jack Bogle's edition to the Little Book series
2. Allen Roth's "how a second grader beat wall stree"
3. Rick Ferri's "all about asset allocation"
4. Roger Gibson's "asset allocation"

Then just come on here and ask questions. I am always amazed at how much I learn coming on this site.

Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: Need opinions about my broker's strategy

Postby davidlukewilcox » Thu May 23, 2013 8:59 am

The options selling strategy is awful! It dramatically increases your exposure to risk. Worse, brokers are incentivized to do this risky approach instead of an approach that yields exactly the same amount, but is less risky.

First, I will discuss how this approach is risky. What your broker is doing is trying to skim off the top assuming that the S&P 500 does not move too much. For example, he's being paid $5 to take the risk that if the S&P 500 goes from 1640 to 1750 by the end of the month, then you have to pay all of the difference after 1750. Meaning, once it goes above 1750, you are stuck paying the difference, whatever that difference might be. You're being paid peanuts to take that risk. The same thing on the downside. If the S&P 500 moves down from 1640 to, let's say, 1500, then you are taking a risk of paying out.

Even if it doesn't hit the strike price (1500 or 1750), if it just gets close, then the value of the option skyrockets. This is the value of the option that you sold that you have to buy back or cover yourself later on. Let's say that the stock market moves down to 1510 and we still have a day or week or so left of the month. Your broker now has two options... 1) hold and take MORE risk that the market keeps moving down, or 2) cover the sell and buy back the position, getting out of a bad place. In both of these situations, you either take huge risk or take huge losses for a gain of peanuts.

Long story short, almost all of the time, you'll be skimming a little bit off of the top, but every now and then, there will be an event that will wipe out your entire [XYZ --admin LadyGeek].

Worse, depending on your compensation scheme with your broker, he's incentivized to take high risks like this. I assume that he makes 20% of all increases in any given year in the portfolio, though this may not be a valid assumption.

Let's assume that he has two strategies:

Strategy 1: Constant return of 15%
Strategy 2: 90% of the time, you make 20%. 10% of the time, you lose 50% of your portfolio. Averaged out, this comes to about 13% per year (an inferior return, and higher risk). This is similar to doing what you're doing now.

If your broker picks strategy 1, he will always make 20%(his commission)*15%(return)=3% per year.
If your broker picks strategy 2, he will make 20%(his commission)*20%(rate of return)*90%(probability of return)-20%*0%*(-50%)=3.6%.

Assuming your broker makes returns based on return when there's a good year, but he does not feel the risk in a bad year, then he is incentivized to do overly risky strategies with your money. In this case, we have a riskier strategy with a worse overall return, but your broker would make more money doing it.
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Re: Need opinions about my broker's strategy

Postby IlliniDave » Thu May 23, 2013 9:07 am

matonplayer wrote:Hi, newbie here. I've been a reader of the forums for a while but have never posted before. Anyway, I was hoping you could offer some independent opinions on my broker's strategy. Last year I came into possession of approximately [XYZ dollars --admin LadyGeek], which i plan to use as my retirement nest egg, hoping to last 40 years. At the advice of a friend at church who works in the financial industry, I signed up with a broker/adviser who works at one of the large brokerage firms. His strategy is somewhat out of the ordinary - he's had me in 50% cash for almost a year, as he expects a significant market correction. In the meantime, we generate income by selling both naked puts and covered calls. His expertise is supposedly in options strategies - he claims that the goal isn't to make the portfolio last, but to generate more than enough income from the nest egg to live on. He claims that he uses the same strategies for both his own and his children's portfolios, and I have no reason to doubt him.

That said, it's difficult watching the market go up and up while the value of my portfolio goes sideways, primarily because I've been assigned to buy stock which then subsequently goes further south.

Any opinions/ideas/suggestions?

Thanks

Stan


Opinion: You're broker's strategy is horrible.

Ideas/Suggestion: Take your money to Vanguard. You will qualify for a personal advisor based on the amount if you would like one. The idea to put it in TIPS or a TIPS mutual fund to buy time while you get your head around the topic of investing if you think you want to ultimately do it yourself isn't bad. You take that approach at Vanguard as well.
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Re: Need opinions about my broker's strategy

Postby ruralavalon » Thu May 23, 2013 9:16 am

Originally I was with a broker who had this strategy, but it didn't do well for me.

Do some reading, http://www.bogleheads.org/readbooks.htm .

Start with --
All About Asset Allocation, by Rick Ferri, and
The Four Pillars of Investing, by William Bernstein.

Get rid of the broker. Move the account(s) to Vanguard.

If you don't want to do it yourself, then hire --
Wiki article link: Rick Ferri of Portfolio Solutions LLC,
Wiki article link: William Bernstein of Efficient Frontier Advisors,
Wiki article link: Allan Roth of Wealth Logic LLC, or
Wiki article link: Larry Swedroe of BAM Advisor Services.
"Everything should be as simple as it is, but not simpler." - Albert Einstein
Wiki article link:Getting Started
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Re: Need opinions about my broker's strategy

Postby livesoft » Thu May 23, 2013 9:36 am

Your broker's strategy is excellent. For him. He gets to play with your money with no obligation whatsoever to you.

You asked whether the options strategy is viable. You can figure this out yourself. Have you compared returns versus a benchmark? I don't think it is viable or everyone would be doing it. Full disclosure: I used to trade options.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 10:09 am

I can't argue with what anyone is saying, for sure. The only caveat is that we're not trading options on the whole market, but on specific stocks. If he thinks XYZ is selling at a discount, we sell puts in order to get paid to buy it a lower price. We then sell out of the money calls at a 10% or so premium. Not saying I agree with it, but that's the strategy. Also, I have trouble believing that commissions are a driving factor in his strategy since we've maintained such a large cash position. The number of actual option trades has been just 2 or 3 per month because (in his opinion) there are no bargains out there currently.

Thanks again for all of your valuable insight.

Stan
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Re: Need opinions about my broker's strategy

Postby livesoft » Thu May 23, 2013 10:11 am

Did you write how much you are paying this person?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Need opinions about my broker's strategy

Postby Johm221122 » Thu May 23, 2013 10:13 am

matonplayer wrote:I can't argue with what anyone is saying, for sure. The only caveat is that we're not trading options on the whole market, but on specific stocks. If he thinks XYZ is selling at a discount, we sell puts in order to get paid to buy it a lower price. We then sell out of the money calls at a 10% or so premium. Not saying I agree with it, but that's the strategy. Also, I have trouble believing that commissions are a driving factor in his strategy since we've maintained such a large cash position. The number of actual option trades has been just 2 or 3 per month because (in his opinion) there are no bargains out there currently.

Thanks again for all of your valuable insight.

Stan

You are taking unnecessary risk
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Re: Need opinions about my broker's strategy

Postby Bogle101 » Thu May 23, 2013 10:16 am

Good lord, playing options strategies with [XYZ --admin LadyGeek] portfolio is ballsy. I guess you should count your lucky stars he is leaving half alone in cash.

With that inheritance/gift/business sale? you have won the game man.

Read the wiki on indexing, choose a conservative allocation like 50% Tax Exempt Bonds, 35% US Equities and 15% International Equities and live a comfortable life.
Taxable: 25% VTSAX | 25% VEXAX | 10% VDMAX | 10% VEMAX | 10% VFSVX | 7.5% VGENX | 7.5% VGHCX | 5% VWEHX
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 10:17 am

To answer the question of how this person is paid, the firm is paid on a commission basis. Per trade.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 10:18 am

Bogle101 wrote:Good lord, playing options strategies with [XYZ --admin LadyGeek] portfolio is ballsy. I guess you should count your lucky stars he is leaving half alone in cash.

With that inheritance/gift/business sale? you have won the game man.

Read the wiki on indexing, choose a conservative allocation like 50% Tax Exempt Bonds, 35% US Equities and 15% International Equities and live a comfortable life.



Bingo. I just need one more push in this direction, as this is what I think I want to do.

Stan
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Re: Need opinions about my broker's strategy

Postby Johm221122 » Thu May 23, 2013 10:19 am

matonplayer wrote:To answer the question of how this person is paid, the firm is paid on a commission basis. Per trade.

As mentioned you one game, you don't need this risk. Invest in your 401, savings bonds, index funds and municipal bonds
John
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Re: Need opinions about my broker's strategy

Postby Cody » Thu May 23, 2013 10:23 am

Will it be difficult for you to "drop" the broker? We found it difficult to tell them (advisors) goodbye. Very hard.

He will put forth a barrage of reasons why you should stay. Making it more difficult. Our stategy was to walk in, say we are through, listened a bit to his "logic" and say we are done. Be sure you have your mind made up going in becuase it may be withering. Just think of this way:
how much a minute will I save for my lifetiime if I choose a better course?

By the way - it has worked out well and now that we look back we still feel the anst of the moment. But we celebrate with every Vanguard statement.

Good luck!
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Re: Need opinions about my broker's strategy

Postby Penguin » Thu May 23, 2013 10:32 am

matonplayer wrote:I can't argue with what anyone is saying, for sure. The only caveat is that we're not trading options on the whole market, but on specific stocks. If he thinks XYZ is selling at a discount, we sell puts in order to get paid to buy it a lower price. We then sell out of the money calls at a 10% or so premium. Not saying I agree with it, but that's the strategy. Also, I have trouble believing that commissions are a driving factor in his strategy since we've maintained such a large cash position. The number of actual option trades has been just 2 or 3 per month because (in his opinion) there are no bargains out there currently.

Thanks again for all of your valuable insight.

Stan

I don't know what the rules are for trading options but I suspect that you are required to have a margin account, and may be required to have a large cash position. I found this on the internet.
In options trading, "margin" also refers to the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying security, or in the case of cash-settled options to pay the cash settlement amount, in the event that the option gets assigned.
Margin requirements for option writers are complicated and not the same for each type of underlying security. They are subject to change and can vary from brokerage firm to brokerage firm. As they have significant impact to the risk/reward profiles of each trade, writers of options (whether they be calls or puts alone or as part of multiple position strategies such as spreads, straddles or strangles) should determine the applicable margin requirements from their brokerage firms and be sure that they are able to meet those requirements in case the market turns against them.

Personally, I would not invest in anything that I did not fully understand.
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Re: Need opinions about my broker's strategy

Postby Ged » Thu May 23, 2013 10:59 am

> That said, it's difficult watching the market go up and up while the value of my portfolio goes sideways, primarily because I've been assigned to buy stock which then subsequently goes further south.

He's under-performing the market and then charging you (I bet plenty) for this result. Why would you tolerate this situation when you say you already understand index investing where you get market performance at very little cost?

You are not receiving a useful service for what you are paying your adviser.

To put it more bluntly you are getting ripped off.

You have a great nest egg that should make you financially secure and it is being wasted.
Lack of planning on your part does not constitute an emergency on my part.
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Re: Need opinions about my broker's strategy

Postby livesoft » Thu May 23, 2013 11:07 am

matonplayer wrote:To answer the question of how this person is paid, the firm is paid on a commission basis. Per trade.

To put that in context .... Many advisors charge a so-called Assets Under Management fee which can range from about 0.05% to 2.00% annually of the total value of your account(s) with them (including the cash). So if you have [XYZ --admin LadyGeek] with them and they charge 2%, that would be [2% of XYZ --admin LadyGeek] a year. In addition to the AUM fee, there could be other fees. Notably, if one is invested in mutual funds, the fees the funds charge (expense ratio, front-end load, 12(b)-1, CDSC, etc) would also be charged.

Low-expense ratio passively managed index funds have expense ratios around 0.05% to 0.25%.

So when you write paid on a commission basis, can you translate the total amounts you have paid as a percentage on an annual basis? In other words, do you really know what you are paying?
Last edited by LadyGeek on Sun May 26, 2013 5:44 pm, edited 2 times in total.
Reason: Removal of personal info.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Need opinions about my broker's strategy

Postby TomatoTomahto » Thu May 23, 2013 12:05 pm

Stan,

I'm curious whether the $3M came from your labor (e.g., selling a business you built) or dropped out of the sky (e.g., inheritance from long lost aunt). I have a suspicion that you would not treat [XYZ dollars --admin LadyGeek] made from the sweat of your brow in such a cavalier manner. Come to terms with the money -- it's yours now and you should not pxxx it away on this "broker's strategy" (and I'm half nauseous calling it a strategy).

I had a friend who traded commodities in the old pits. He told me that they loved it when lottery winners would show up. They'd have taken the fish's money in 9 months. Don't let that be you.
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Re: Need opinions about my broker's strategy

Postby jnsickler » Thu May 23, 2013 12:18 pm

This brings to mind the old joke about how to get [XYZ dollars --admin LadyGeek] in the stock market -- start with [more than XYZ! --admin LadyGeek]
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Re: Need opinions about my broker's strategy

Postby InvestorNewb » Thu May 23, 2013 12:28 pm

A fool and his money are soon parted. This applies to the OP if he adopts the strategy in his original post.
Current Holdings: VTI, VXUS, VNQ, VCE (largest to smallest)
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Re: Need opinions about my broker's strategy

Postby Fallible » Thu May 23, 2013 12:55 pm

While you're firing your broker, it's not to late to check into the Bogleheads' wiki on managing a windfall: http://www.bogleheads.org/wiki/Managing_a_windfall
“Knowing yourself is the beginning of all wisdom.” ~Aristotle
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 6:05 pm

TomatoTomahto wrote:Stan,

I'm curious whether the [XYZ --admin LadyGeek] came from your labor (e.g., selling a business you built) or dropped out of the sky (e.g., inheritance from long lost aunt). I have a suspicion that you would not treat [XYZ --admin LadyGeek] made from the sweat of your brow in such a cavalier manner. Come to terms with the money -- it's yours now and you should not pxxx it away on this "broker's strategy" (and I'm half nauseous calling it a strategy).

I had a friend who traded commodities in the old pits. He told me that they loved it when lottery winners would show up. They'd have taken the fish's money in 9 months. Don't let that be you.



Thanks agin for all of the valuable advice.

Stan
Last edited by matonplayer on Sat May 25, 2013 11:46 pm, edited 1 time in total.
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Re: Need opinions about my broker's strategy

Postby livesoft » Thu May 23, 2013 6:08 pm

livesoft wrote:....
So when you write paid on a commission basis, can you translate the total amounts you have paid as a percentage on an annual basis? In other words, do you really know what you are paying?

And does this options strategy really add to your income taxes? In other words, what is the after-tax return compared to the after-tax return of some of the methods recommended here at Bogleheads?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Need opinions about my broker's strategy

Postby likegarden » Thu May 23, 2013 7:56 pm

The year I was rolling over my 401(k) to Vanguard my (former) neighbor showed me the investment newsletters he was following. He said he was starting to do options trading. Next he sold his house and moved with his family into a rented place. That looked like a loser's game to me then.
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Re: Need opinions about my broker's strategy

Postby Toons » Thu May 23, 2013 8:01 pm

I sum it up in 3 words: "Run Don't Walk" :shock:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Need opinions about my broker's strategy

Postby TomatoTomahto » Thu May 23, 2013 10:21 pm

matonplayer wrote:
TomatoTomahto wrote:Stan,

I'm curious whether the [XYZ --admin LadyGeek] came from your labor (e.g., selling a business you built) or dropped out of the sky (e.g., inheritance from long lost aunt). I have a suspicion that you would not treat [XYZ --admin LadyGeek] made from the sweat of your brow in such a cavalier manner. Come to terms with the money -- it's yours now and you should not pxxx it away on this "broker's strategy" (and I'm half nauseous calling it a strategy).

I had a friend who traded commodities in the old pits. He told me that they loved it when lottery winners would show up. They'd have taken the fish's money in 9 months. Don't let that be you.



Thanks agin for all of the valuable advice.

Stan


Not to beat a dead horse, but every option trade your broker makes, remember that it is the money you busted your butt for that he's trading. Building a [XYZ --admin LadyGeek] business is quite an achievement; congratulations. You've made it to third base, don't get thrown out trying to steal home.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 10:22 pm

The good news (if you can call it that, I guess) is that there's little of my nest egg at risk - 50% cash, 25% bonds, little actual option trading. Any loss has really been just the lost opportunity of the recent bull market, and the wiki page for windfalls recommends not investing in anything other than safe investments for the first year, so I guess I'm really not all that far off track. Moving forward, I'm seriously considering using VWINX as my core holding - just trying to decide if I should dollar cost average into it or not. Any recommendations?

Thanks again,

Stan
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Re: Need opinions about my broker's strategy

Postby TomatoTomahto » Thu May 23, 2013 10:26 pm

matonplayer wrote:The good news (if you can call it that, I guess) is that there's little of my nest egg at risk - 50% cash, 25% bonds, little actual option trading. Any loss has really been just the lost opportunity of the recent bull market, and the wiki page for windfalls recommends not investing in anything other than safe investments for the first year, so I guess I'm really not all that far off track. Moving forward, I'm seriously considering using VWINX as my core holding - just trying to decide if I should dollar cost average into it or not. Any recommendations?

Thanks again,

Stan


You have a good attitude about the lost opportunity. Since it's such a large amount, I personally would lump sum half and then DCA the remainder in over 12-18 months. Technically, you've been out of the market for a while, and you don't want to be out of the market too long. OTOH, if the market goes up, you can emphasize to yourself that you put quite a sum into the market; if the market goes down, you can emphasize to yourself that you kept some powder dry to invest more cheaply. Especially with a significant portion of your net worth, it's best to avoid regrets. Just my $0.02.
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Re: Need opinions about my broker's strategy

Postby Watty » Thu May 23, 2013 10:57 pm

matonplayer wrote: is there a chance the options selling strategy is a viable one?


Zero chance of that. Options are a zero sum game where there is a winner for every loser, but there are lots of transactions cost and you have to pay a good part of any winnings in taxes. For you to win you are just betting that you are smarter than the guy on the other side of the trade.

The problem is that if it was a viable strategy and the guy could pull it off, then he would not be working for you since he would quickly find someone with a portfolio a hundred times the size of yours or he would be earning seven or eight figure salary working on wall street. Even if he is just making 2% a year off your portfolio that would only be $60k a year which is peanuts compared to what someone could make with a successful strategy.

If this broker is one of them that has an office someplace like one near my house that is located between a pet shop and frozen yogurt shop then that is a pretty good sign that you are not dealing with an up and coming wall street wizard.

Using a financial advisor is not an bad idea for someone with a portfolio your size and some people have found them very worthwhile. The problem is that you don't have a financial advisor your have a salesperson pretending to be one. Having him manage your portfolio is like having a used car salesman manage buying you a car.

The really really good news is that he didn't get you into a bad annuity or life insurance so you are a lot better off than some people.

The first thing to do is to call him and tell him that you do not want him trading on your account without you giving written permission for every trade. Follow up that call with a certified letter. The problem is that once he gets a clue that you are rethinking your arrangement with him then he may quickly fleece you for all he can before your leave.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Thu May 23, 2013 11:07 pm

Fortunately, no fear of being fleeced. He's not allow to make any trades without explicit permission - and FWIW, he works in a high rise in a major east coast city :) and he's an employee of one of the top investment firms in the country. Not to say that the strategy is any better because of it, but I don't think there's an active attempt at larceny or fraud to worry about.

I hope.
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Re: Need opinions about my broker's strategy

Postby michaelsieg » Thu May 23, 2013 11:40 pm

Stan,
I don't know much about options trading, but you are putting all your eggs (your hard earned money) into an unconventional strategy of one advisor. With unexpected large market swings, you could really get hurt, so why take such an unnecessary risk if you have pretty much have won the game?
Even if you choose not to be a do-it-yourself investor, find a good financial advisor and have him help you put a good plan together. Rick Ferry and Larry Swedroe post frequently on this forum - read some of their posts and they might be able to help you. Also, in the book "Bogleheads guide to retirement planning" or in Dr. Bernstein's "Four pillars of investing" there are good chapters about how to choose a financial advisor, it is worth reading these chapters and then getting good advice in your situation.
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Re: Need opinions about my broker's strategy

Postby racy » Fri May 24, 2013 3:32 pm

matonplayer wrote:Fortunately, no fear of being fleeced. He's not allow to make any trades without explicit permission - and FWIW, he works in a high rise in a major east coast city :) and he's an employee of one of the top investment firms in the country. Not to say that the strategy is any better because of it, but I don't think there's an active attempt at larceny or fraud to worry about.

I hope.


Yesterday, Bernie Madoff was implicating J.P. Morgan.
http://www.foxbusiness.com/industries/2 ... was-doing/
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Re: Need opinions about my broker's strategy

Postby JW Nearly Retired » Fri May 24, 2013 4:25 pm

matonplayer wrote: Fortunately, no fear of being fleeced. He's not allow to make any trades without explicit permission - and FWIW, he works in a high rise in a major east coast city :) and he's an employee of one of the top investment firms in the country. Not to say that the strategy is any better because of it, but I don't think there's an active attempt at larceny or fraud to worry about.

I hope.

Works in a high rise for a top investment firm! Unfortunately, by your naivety you are fleecing yourself. I don't think anybody here can help.
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Re: Need opinions about my broker's strategy

Postby Clearly_Irrational » Fri May 24, 2013 4:42 pm

Even if you assume that he is both skilled and trustworthy there are two problems with this plan:

1) The % by which he beats the market is probably lower than his fees

2) Playing the options game is often like picking up pennies in front of a steamroller, well dimes I suppose since it's leveraged. It'll go fine for quite some time then eventually something unusual will happen and you'll get flattened.

Options are good for betting and insurance type moves but poor for generating safe income or buy & hold type investing. If you have a special insight of some type options can help you really take advantage of it, but the sad truth is that special insight is pretty rare when it comes to the market.

All that said I'm not sure he's wrong about the upcoming correction, the problem is are you willing to wait several more years for that to happen? Even if we're in a bubble we're much closer to the beginning than the end.
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Re: Need opinions about my broker's strategy

Postby fatlittlepig » Fri May 24, 2013 5:01 pm

fatlittlepig here knows a little bit bout options.
basically the strategy he is employing is not a high risk strategy, but I have a feeling that you don't quite understand it- therefore it's not appropriate for you. selling naked puts actually is a decent strategy if you know what you are doing, it could be a good way to enter into a position. covered calls are ok but again they can prevent potential capital appreciation.

bottom line however is that you don't need to do any of this stuff, put into a low cost index fund and you gots it made.
also you don't mention how much he's charging for this which is very pertinent.
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Re: Need opinions about my broker's strategy

Postby jlhod1 » Fri May 24, 2013 5:27 pm

William Bernstein is revered (correctly) on these boards. This article from last fall is especially topical for your current predicament:

http://money.cnn.com/2012/09/04/retirem ... index.html

Quotes: "I began to understand this point 10 or 15 years ago, but now I'm convinced: When you've won the game, why keep playing it?"

":At the end of your career, you have no more earnings capacity left beyond Social Security or a pension. You have less of what life-cycle theory calls "human capital." So if you have a long series of bad returns, plus you're withdrawing 4% or 5% of your portfolio to live on it, then in 10 to 12 years, you may not have anything left."

"The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension. This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds. Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."

Annuities often get a bad rap (correctly), but Vanguard does have some lower cost ones that might make sense in some situations.

I also second the comments on considering using Larry Swedroe, Rick Ferri or Bernstein himself.

I am REALLY scared for you. To have worked so hard, built a great business won the game of having enough for security and now, NOW to be taking this huge chance with your retirement savings.

I agree with everyone here. RUN!!!

Also, don't worry too much about the bull market. You have won the game, switch your thinking to capital preservation and income.

Good luck!
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Re: Need opinions about my broker's strategy

Postby lethean46 » Fri May 24, 2013 5:38 pm

Penguin wrote:
matonplayer wrote:I can't argue with what anyone is saying, for sure. The only caveat is that we're not trading options on the whole market, but on specific stocks. If he thinks XYZ is selling at a discount, we sell puts in order to get paid to buy it a lower price. We then sell out of the money calls at a 10% or so premium. Not saying I agree with it, but that's the strategy. Also, I have trouble believing that commissions are a driving factor in his strategy since we've maintained such a large cash position. The number of actual option trades has been just 2 or 3 per month because (in his opinion) there are no bargains out there currently.

Thanks again for all of your valuable insight.

Stan

I don't know what the rules are for trading options but I suspect that you are required to have a margin account, and may be required to have a large cash position. I found this on the internet.
In options trading, "margin" also refers to the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying security, or in the case of cash-settled options to pay the cash settlement amount, in the event that the option gets assigned.
Margin requirements for option writers are complicated and not the same for each type of underlying security. They are subject to change and can vary from brokerage firm to brokerage firm. As they have significant impact to the risk/reward profiles of each trade, writers of options (whether they be calls or puts alone or as part of multiple position strategies such as spreads, straddles or strangles) should determine the applicable margin requirements from their brokerage firms and be sure that they are able to meet those requirements in case the market turns against them.

Personally, I would not invest in anything that I did not fully understand.


Reread Penguin's comments - and quote re options trading. Your CASH may be AT RISK.
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Re: Need opinions about my broker's strategy

Postby likegarden » Fri May 24, 2013 7:42 pm

I read here many times that when sufficient money for retirement is accumulated we should reduce risk and go more into high quality bonds. The OP just did the opposite and went into more risk when he did not need to.
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Re: Need opinions about my broker's strategy

Postby livesoft » Fri May 24, 2013 7:47 pm

^That's not quite true since cash is less risky in a sense than even bonds. And most of the portfolio appears to be in cash ... which is of course a drag on returns.

Nevertheless, "large brokerage firm" and "he's an employee of one of the top investment firms in the country" are about the biggest red flags I have ever seen. Only folks who are good at extracting money from clients can be employees very long at those places.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Need opinions about my broker's strategy

Postby matonplayer » Fri May 24, 2013 10:27 pm

All, thanks again. Just to clarify a few points - I understand the option strategy quite well - I'm just not convinced its a viable alternative to buy and hold, which is why I'm here asking for opinions. :happy Bottom line is that I did some more analysis of my portfolio and there's no question now that I have to make a change. I looked at the net result of the covered calls that were sold and subsequently exercised - and sure enough, the stocks have all made big gains.

Thanks to everyone for their input. I'll be sending a notice to the broker this weekend to cease trading.

Stan
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Re: Need opinions about my broker's strategy

Postby jlhod1 » Sat May 25, 2013 8:05 am

matonplayer wrote: I'm just not convinced its a viable alternative to buy and hold, which is why I'm here asking for opinions.
Thanks to everyone for their input. I'll be sending a notice to the broker this weekend to cease trading.Stan


There is NO viable alternative to buy and hold. That much is clear.

The only question is what is your investing life stage which dictates your AA. In this extraordinary low interest rate environment generating enough income from bonds is all but impossible, so that is where a *real* financial advisor might make suggestions as to how to AA for capital preservation and money to live off.

Good luck and congratulations on your decision before more serious damage was done. :sharebeer
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