Dr. Doom
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http://www.kiplinger.com/features/archives/2008/09/krr_tapping_a_portfolio_in_a_bear_market.html
Here is a link to get you started. Work with real clients for over a decade, doing accumulation, risk, tax, investment, estate and retirement planning, while maximizing value and protecting the downside using strategies like the Kiplinger link, which is just a sample, and then you will begin to earn the right to discuss who delivers value at what cost.And I’m not endorsing the Kiplinger article, rather, this is a starting point for a meaningful discussion about a critical financial planning, like portfolio withdrawal strategies.
Who gives a crap about option trading, other than selling a few calls or puts on concentrated stock positions, like executive company stock?[quote=Getthere]http://www.kiplinger.com/features/archives/2008/09/krr_tapping_a_portfolio_in_a_bear_market.html
Here is a link to get you started. Work with real clients for over a decade, doing accumulation, risk, tax, investment, estate and retirement planning, while maximizing value and protecting the downside using strategies like the Kiplinger link, which is just a sample, and then you will begin to earn the right to discuss who delivers value at what cost. [/quote] Good find. I might have a couple nervous pre-retirees read that.I will admit I do NO options for any of my clients, but I am more than willing to learn new ( i realize they are not new, but learn them more thoroughly) concepts and strategies, if nothing else we should all be able to explain WHY we don’t do them. I have seen nobody in this thread yet take 1 of his scenarios and explain why it is garbage or he is incorrect. I do take issue with the fact you are doing this for 1 person, 1 account, correct? I do not disagree that with 10-15% of an acount, for the appropriate client, not ALL of them, this could be a good way to add some value. I immediately think of the large number of engineers in my area who would walk around with a woody all day trying to digest this sort of strategy.
I run my shop more like anonymous, and simply do not have the time, and admittedly enough knowledge, to do this sort of thing for 200 households. But I think you guys dismiss him completely simply because everyone has always told us “options bad!!” and not because you understand them completely and feel they are inappropriate for reasons A, B, and C.
I don't think anyone could disagree that Double-P brings some fire back to this forum...just look at which threads have the bulk of the activity these days... There are some very interesting strategies in his option examples, and while I understand what he's doing, I wish it were second nature for me like it is for him. If I were more comfortable with spread-straddle strategies, I might actually do more for clients than covered call writing.
There ARE a bunch of friggin' pretenders in this industry. I see their damage on a regular basis when looking at client statements after they wash out of the industry. One thing Put and I will agree with is that the barriers to entry into this industry are far too low and too much damage is done to real people before the unqualified financial advisors are weeded out of the business. Some of you news will take issue with this, as will those who came into the industry with nothing but a high school education, and have beaten the odds to be wildly successful. That's fine...you may well be the exception to the rule. My argument for you is that the higher entry barriers should not prevent your success, only delay it. In case you are curious, my idea for minimums into the industry would be at LEAST a relevant bachelors degree (finance, economics, etc.), a legitimate advance certification (CFA, CFP, ChFA, etc.), and five years of industry experience working for a veteran before you self-manage your first account. Hell, even Joe the Plumber has more of an entry barrier to his industry than we do. I don't expect you all to agree with this position, and certainly, many have been successful with less qualifications, but my anecdotal evidence tells me that a disproportionate amount of the damage done to main street portfolios has been done by folks who did not (and likely could not) meet those requirements. I won't tell you that meeting those requirements is a magic bullet for sound portfolio management...I'm living proof that you can still lose a ton of money for a client in a market like we've endured this past year. I'm not at all satisfied to be beating the indexes this year. At the same time, I think clients have a right to expect that their advisor will be well-schooled in portfolio management before they start managing people's life savings. The mistakes I've made have paled in comparison to some of the stupidity I've witnessed in the past (70% of a client portolio in Munder Net-Net in 2000, for example), and I think investors would be in far better shape if the industry demanded more from it's advisors than a pathetic excuse for admittance like the series 7. That's my soapbox for the day. It's unfortunate that for all his experience and education, Double-P has, in the past, foolishly posted racist and sexist statements that caused a permanent IP ban, keeping out interesting (and yes, often provocative) posts that could be a real benefit to advisors coming here looking for ideas. Yes, the industry has changed and we've moved on. That doesn't mean that the past doesn't hold some very good ideas for client accounts.ice-i don’t think the question is whether or not they are complex. i never said they were. but to think passing the series 7 somehow makes you understand them is a stretch. i have passed alot of tests in my younger years and rarely UNDERSTOOD the material enough to explain it to someone else. most advisors do not look at the 7 manual as an instrument of learning. it is a burden and something they must memorize just enough to pass the exam, that is it.
Indy, I agree about minimum qualifications and education. That’s why some of Putz’s unchallenged ignorant investing comments bother me. Saying things like, buy and hold is passe for the boomers, advisors should not be paid if absolute returns are negative over a year, real advisors have to use options strategies, and so on.
Bond Guy quotes: Gotta side with Put on this one. Not so much for the one liner put downs of what I perceive as hard working well intentioned advisors, but with what the financial advisory business has become. Going back to Put's options trades he's exactly right. Whether these trades actually work is not relevant. It is that he is executing a well thought out investment strategy. Done enough times and a track record will emerge. That record will tell him whether he is on the right track, whether he should modify his approach or just plain stop. Included in his strategy is a stop loss, 15 or 20%. That's as good as it gets. How many here have stop losses on their clients accounts? Turn the clock back 25 years and Wall Street was filled with advisors coming to clients with their money making strategies. Some were short term high risk, others long term low risk. Brokers, as we were known then, employed options strategies not unlike some mentioned here, others like myself offered buy write strategies and dividend roll programs, now called dividend capture and employed by some of the biggest funds in the world today. Back then, we did it ourselves. Prospective clients had a real choice when picking a broker. Today, for the most part, that choice is gone. I'm not saying anyone here is a bad guy. It's just most in our biz are the same guy. Some are better at this than others but basically most advisors offer the same thing. What our industry offers is off the rack cookie cutter planning, execution, management, and product selection. We slap a fee on it and call it good. It is far from good. Many here may not like the messenger, but you need to hear Put's messege because he is exactly right. There is no reason on this planet for anyone to pay you a fee to lose 40% of their hard earned money and offer them nothing more than investment platitudes. This is mostly BS, that someone the good old days of real traders using stop loss or other options strategies, beats a long term buy and hold strategy. Prove it by talking about long term absolute return, show me the research. You can really get get burned with stop loss strategies, where market fluctutions are less severe. Of course, overconcentrated singe-stock positions should be protected. Portfolios should be diversified well before coming into a down market like this, allocations can be slightly modified for reasonable market expectations. Yield and non-correlation are important portfolio construction concepts. I agree, there are too many uneducated folks still in the business. As for beginners, stick to your strategies, and don't be intimidated by a bunch of old crotchety BS. Over the long run, bonds offer about twice the return of cash, and owners (stocks) can return up to twice what lenders make. Instead of investigating fancy options strategies, advisors should be focused on cutting out the middle man (12b1 fees), and getting paid more directly (wrap, fee only), without wasting money on admin charges or even ticket charges, so they can spend more time with each client working on comprehensive planning and investment strategies and service. Still basic concepts, discipline is simple, but not easy.Here's a little supporting paste and link as food for thought:
"While it may seem simplistic, a buy-and-hold approach to investing, characterized by continuously holding a very high percentage of equities with only very infrequent though carefully considered buy-sell decisions, can, in my opinion, give small retail investors a slight "edge" over other investors and traders based on the efficiencies cited above.Numerical Comparison
To gauge the impact of frictional costs on returns, let's compare two portfolios over a 10-year period in a market that returns 10% annually:
Buy-and-Hold: Assume no turnover. At 10% annual appreciationn, $100 grows to $259 after 10 years. After payment of 15% long-term capital gains tax on the $159 gain at the end of year 10, the net portfolio value becomes $235, for an annualized after-tax return of 8.94%.
Trading: Assume 200% annual turnover, or the equivalent of two round-trip trades per year at a cost of 0.50% per round-trip. Trading costs as stated and annual taxes of 28% on short-term gains reduce the 10% annual market appreciation to (10% - 2 x 0.50%) x (1 - 0.28), or 6.48%. At this after-tax growth rate, an original $100 investment becomes $187 after 10 years.
Assuming that trading produces no pick-up in return, the frictional trading costs and additional tax lead to an inferior after-tax annual return 246 b.p. lower (8.94% vs. 6.48%) than the return available through buy-and-hold investing. On a pre-cost, pre-tax breakeven basis, the trading strategy will need to outperform the buy-and-hold alternative by a full 342 b.p. annually in order for trading to beat the buy-and-hold alternative.
As a rough rule of thumb, then, you should engage in trading only if you honestly believe that your buy-sell decisions give you at least a three or four percentage point advantage annually (and more if your turnover exceeds 200% per year), above the buy-and-hold alternative. "
http://seekingalpha.com/article/53970-the-buy-and-hold-versus-trading-decision-which-is-the-better-option-and-whyYou can really get get burned with stop loss strategies, where market fluctutions are less severe.
You're kidding right? Risk management is no longer our job? CSCO dropped 90% in the last bear market. A stop loss was a good idea. You use stop losses to limit downside risk. Every single individual stock position in my book is pitched a stop loss. Period. During less volatile times, stop losses are effective about 60% of the time, i.e. the stock is lower than the stop loss 3 months later. What makes the strategy so effective is the average loss on the 60% of stops that work are of far greater in magnitude than the 40% of stops that are ineffective. Stocks move in TRENDS!!!!! And when is risk management even more important? Maybe during more volatile times? I recently had a large number of clients stopped out of a good quality company due the the panic selling in the market. What did I do? Bought it back 40% lower than where it was stopped out. Everybody wins. Of course I could have told them that buy and hope was the way to go as it was a good quality company. I like my way better.Couple of other points. Sure, we advisors are "average" people, serving "average" investors - mainly the mass affluent. Most clients who have more than 1m have multiple advisors - I sure they will gravitate to genius advisors like Putz, except he does not have any clients.
Second, whatever the real return of an average buy and hold portfolio, the main goals should be: accumulation and preservation. It's pretty silly to talk about short term performance in a down market, and ignore the real reason we are holding stocks: inflation, which of course is not a big problem right now. This guy Putz is somehow suggesting that our client's porfolios should not be down now, otherwise we're not real advisors. That is total BS. Burden of proof is to show a meanful alternative, not some short-term race track betting strategies. How silly to be focused on BS, when the real problem is inadequate savings. I want to be certain that the next generation of financial advisors is encouraged to maintain the course in this down market, not thrown of track by the rantings of someone who wandered over here from the Yahoo day trading forum. If you put someone in an A share American Funds balanced or equity fund or whatever, and I'm running buy and hold ETFs at 1%, we can both hold our heads up high, and we're talking to our clients about goals, and protecting the down side, and your choices for how you allocate your discretionary dollars, and cash reserves, and so on, we're doing our jobs, probably a lot better than some puffed up transactional douche bag.Second, whatever the real return of an average buy and hold portfolio.
Since we are talking about the "average" buy and hold portfolio, the performance over the last ten years has sucked due to the equity allocation held during the two, count them two biggest downturns in the market since the great depression. Keep pitching buy and hope, I like more clients.Primo, I said you can get burned with stop losses, not that they are bad. We all know that specialized strategies can work, there are also economies of scale pertaining to the size of a portfolio, and diversification. There are some pretty clever people at managed fund companies, using some pretty clever trading strategies and techniques, with some pretty crappy results.
How about showing me some research where retail advisor are adding a lot of value using Putz strategies? My point is, the evidence, as far as I can tell, is usually pretty much narrative. And some folks become performance legends in their own minds, while the actual performance results often suck.I was commenting on the naive stop loss statement. I do a little option business, but not enough to bang the drum about it. As far as research, do your own. You cannot buy past returns, so I take research with a grain of salt.
[quote=Getthere]
Since we are talking about the "average" buy and hold portfolio, the performance over the last ten years has sucked due to the equity allocation held during the two, count them two biggest downturns in the market since the great depression. Keep pitching buy and hope, I like more clients. I don't get your meaning. [/quote] I will use smaller words and simpler thoughts. Since the buy and hope mantra is you can't time the market and managers underperform their benchmarks due to this and fees, the "average" equity portion of a portfolio is negative (lost decade in stocks) over the past decade and even more so when you consider inflation. Better?Patronizing talk does not flatter you.
Make your point. So far, all I see is BS. Make your claim of superior performance, and back it up, or whatever. How does this relate to what Putz, Bond Guy, and Indy said? How does this relate to what you learned in your CFP classes, being paid a fee in a down market, buy and hold versus transactional trading using options, or any other coherent point that you want to back up using something other than narrative evidence?[quote=Getthere]
Patronizing talk does not flatter you.
Make your point. So far, all I see is BS. Make your claim of superior performance, and back it up, or whatever. How does this relate to what Putz, Bond Guy, and Indy said? I did not comment on their statements, I commented on yours. How does this relate to what you learned in your CFP Not a CFP classes, being paid a fee This is when actual work happens. A monkey could make money in a bull market, don't mistake that for brains. Lower risk (i.e. losses) in a bear market should be paid for, yes? Otherwise go to Fidelity and they will tell you what worked last year. in a down market, buy and hold versus transactional trading using options again not talking about options, or any other coherent point The market went into a negative trend in Oct 2000. Back to a positve trend in Mar 2003. Back to a negative trend on Jan 4, 2008. Act accordingly, or you could just say to hold on because the market is positive 3 out of every 4 years, maybe shove the piece showing what happens to returns if you miss the best ten days in the market and wait for the ACAT. that you want to back up using something other than narrative evidence?[/quote]or any other coherent point The market went into a negative trend in Oct 2000. Back to a positve trend in Mar 2003. Back to a negative trend on Jan 4, 2008. Act accordingly, or you could just say to hold on because the market is positive 3 out of every 4 years, maybe shove the piece showing what happens to returns if you miss the best ten days in the market and wait for the ACAT.
So? Make your point about " act accordingly" if you want to have a dialogue.Indy and iron horse - well said ! Lets face it, the 7 is a joke as to how it equates to what we do. Honestly, I believe what we have on these boards are a difference of how we manage money. Guys like Ice and Get and Walk manage money to try and “beat the market” . Lets be honest, over time no one does, not even the best fund managers. Some of us manage for absolute return. I think it also depends on your book. My best friend works at MS and has been there for 25 years. He is a Gorilla. He has about 100 clients, manages over 700 million. His clients aren’t looking to “beat the market”. They have already won that game. They want an absolute return. Options do have a place in some portfolios, as do commodities. He was the first person who I remember on the retail side ever admitting he uses both in client accounts along with some other securities that I would wager 90% of us never thought of using before and he is very successful at it.The issue is when you have inexperienced reps using securities or strategies (options, muni pfds, commodities, conv bonds, CMO’s, margin accounts, short sales) without proper training or a true understanding how they work. Ice, I dont know you or your background , but I find it odd that your firm would allow someone as inexperienced as you to run your own accounts on a discretionary basis.