We have officially begun a new year and with that I have decided to start a new quarterly series. As many of you know that have been reading for any length of time, every month I put together a very detailed financial report that details out gross income, expenses, net worth, savings rate, and progress on the 7 year 3 month mortgage pay off goal. Since the report already pushes 3,000 – 4,000 words a month, I thought it would be more appropriate to provide details of the equity portfolio in an entirely separate post.
Also, I don’t really see the benefit of updating this on a monthly basis, quarterly should be just fine.
One of the guiding tenets of this blog is that of FULL TRANSPARENCY. This is another step in living up to the high standards we set here at GYFG.
This will serve several purposes:
- It will force me to analyze the performance of my portfolio.
- It gives you a better view of what is under the hood.
- It will also provide some visibility around where the increases come from. Too many people overestimate their returns and forget about new money contributions, company matches, dividends, etc.
Breakdown of Portfolio Performance [3/31/16 vs. 12/31/15]
You may have noticed in the title of this post that the portfolio is up 7.2% so far in 2016, and I will be the first to admit that this is a bit misleading at first glance. But never fear, I will be breaking down the components of where the gains came from and will also be comparing the performance to the S&P 500 as my benchmark.
For many of you this will be your first time seeing a waterfall chart. If this is your first time I hope you like the visual of how the portfolio grew and what made up the gains.
Now let’s breakdown the buckets…
2015 Ending Balance = $121,400
[+ $7,065] Contributions – 2016 Contributions to Mr. GYFG 401K. We lost the tax advantage this year for Mrs. GYFG and stopped contributing to her IRA.
[+ $5,169] Option Premium Collected + Closed P&L – This is representative of the option premium I collected for selling cash secured puts, covered calls, other option selling strategies, and any other realized gains from closing stock positions (there have been no closed positions this year).
[+ $0] 401K Matches – At this time I am the only one in the GYFG household that has a qualified retirement plan through work that offers contribution matches. Last year the company I work for offered 25% on up to 6% of your income. This year it has increased to a 50% match, but it will only be on up to 4%. The first match will not happen until April. Based on about $80K in earnings in Q1 I expect to receive a match of $1,600 in April.
[+ $458] Dividends/Interest – One of the rules I use when selling covered calls or puts is to only do this on stable companies with a long history of paying dividends, and a dividend rate of 3% or greater. It is just another way I look to increase my margin of safety in the event that I am exercised and forced to take a stock position from short puts. It also helps to reduce cost basis on long covered call positions, until the stock is eventually called away. The interest is very minimal and comes from interest on cash sitting in my brokerage accounts.
[- $3,965] Current MTM Gain/(Loss) – This has improved slightly from the end of year MTM loss of $4,500 in 2015. I will detail them later in the post. This is a little misleading by itself, because the premium from the $5,169 above offsets these open MTM losses.
2016 Q1 Ending Balance = $130,127 [+ $8,727 or + 7.2%]
Now that you can see the detailed breakdown you realize that a large part of the portfolio increases came from new contributions. When you back out the contributions you are left with the investment gains.
Note: I include the 401K match as an investment gain (none in Q1, they will hit account in Q2). It is not money I contributed and I don’t distinguish it from market gains.
This leaves a gain of $1,662 or 1.3%.
This compares to the return of the SPY (ETF representing the S&P 500) of 0.8% before dividends or 1.33% with dividends.
Note: the SPY gain was calculated taking the March 2016 closing price of $205.52 and total return here.
What is the Current Make-up of the Portfolio?
First and foremost I should remind you that of the $130,127, only about $45,432 is actually invested (about 2X where I ended the year). The rest is sitting in CASH. This leaves me sitting with 65% of my investable assets (down from 78%), across my brokerage accounts, in CASH. This is very telling with respect to how I feel about current market valuations.
The market decline that seemed to have bottomed in February made for a good opportunity to increase the amount of cash I have working for the GYFG household. I am still following the 4 tier system to deploy cash. In addition to this cash stash, we have also been building up our savings account that currently has about $85K in cash as I type this. This will be a growing problem over the next 9 months (a good problem to have I suppose).
We are preparing ourselves to take advantage of much better prices ahead. I don’t fear the erosion of inflation on the purchasing power of our dollars. I actually think that cash will be one of the best performing asset classes in 2016.
Current Open Positions
- CAT – Covered Call
- OIH – Covered Call
- PG – Covered Call
- VZ -Covered Call
- WMT – Covered Call
- SPY – Big Fat Jade Lizard
- XLE – Covered Call, Short Callspread
Well there you have the second portfolio update (you can see update #1 here). This may evolve over time, but for now this is likely the format that I will continue using going forward. The next update will be comparing Q2 YTD of 2016 vs. December 2015. One day I will also include performance of my P2P investments, REIT’s, and Rental Real Estate. Or I may even create a separate post series. I have not decided yet…if you have an opinion, please let me know.
How did your portfolio do in Q1 of 2016? What is your plan for the rest of 2016?
– Gen Y Finance Guy