Year End Account Summary – 2009

2009 will go down as one of the most interesting years for the markets in my opinion.  We started the year with panic as if the world would end and nobody would ever buy any products or services ever again and then jumped into the rally that acted like it never had seen a bear.  I didn’t panic as much on the way down (probably should have more), but also didn’t join in the party as much as I should have on the way up even though on March 12, 2009 I posted a chart and said it was time to buy the S&P 500.  That left me with a good year when added together.  I wasn’t as aggressive in 2009 as I’ve been in previous years due to a lot of changes going on in my personal life including a precarious job which I left in August, starting a new job in late August and getting registered as an Investment Advisor in Q4.

While those events took time out of my day and kept my focus away from researching, trading and blogging, the biggest difference was the change in my mindset and approach to investing.  Even though we have a good cushion of cash and CDs for emergencies and my wife has a good, relatively safe job, we didn’t want to risk having to dip into our savings during a recession.  It also made capital preservation more important for our household than growth for the year.  If only I had that mindset change a year earlier…

As I mentioned above, I had a good year.  I didn’t take big risks, but still finished the year with a better return than the Dow Jones Industrial Average and just under the return of the S&P 500.  One more day like December 31st and I’d have pulled ahead of the S&P 500 too.  That’s how close I was.  Of course I’d rather have beaten both indices, but by staying under invested and without taking much risk that’s hard to make happen.  I’ll ease back into bigger risk taking in 2010, but would prefer to see a 10-15% correction first.  If we get that, I’ll be ready to jump in bigger again.  Until then, I’ll have to be content with tracking the indices with less overall risk.  That means the days of leaving myself open to owning equities on margin are over for the time being.  It’s been a long time since I’ve been in a position where I’d use all of my cash reserves if every option I was short was assigned and I’m not sure when I’ll return to that style of investing.  Instead, I’m using more “double” ETFs and achieving a somewhat similar outcome.

Even though I finished the year with a percentage gain from where I started the year, I took a realized loss on all of the positions that were losers from 2008.  That left me with a realized loss (for tax purposes) of $24,065.30 in 2009.  This 2009 loss in addition to my large realized losses from 2008 leaves me with at least two more years of tax free gains to make while I carry over these losses and deduct them from my planned gains over the next couple of years.  Depending on my returns over the next few years it could take me three to four years to make up for those losses.  That’s when it’ll get interesting – when I have to decide if I’m beating the indices enough after taxes to continue trading my full account versus doing more buying and holding.  Basically, if I’m not beating the indices by 28% or more I would do better by not selling and incurring the taxes on my capital gains.  In 2007 I destroyed the indices which made trading more than worthwhile.  I don’t think I’ll have that big of a victory again in the near term, but do believe I can make this worth the tax consequences again.  I still believe selling puts is a safer approach to investing than just a simple buy and hold model. 

I finished 2009 with a combined account balance of $85,007.52 ($73,920.27 with Interactive Brokers and $11,087.25 with TD Ameritrade).  I have a deposit on the way to IB for $16,000 which will put me over the $100,000 mark finally, assuming I don’t take a $1,000 loss in the next few days.  I made it as high as $99,300 intraday more than a year ago and have taken way too long to get back up to this level.

Here’s exactly how my returns compare to the major indexes.

My 2009 return: +25.49%
Annualized return since 4/8/07 (my blog’s beginning): -12.45%
Deposits for the month: None for December
Deposits for the year: $16,000.00 (February, April, May and June)

According to Morningstar, here’s how the major indexes have did in 2009.

Dow Jones Return: +22.68%
S&P 500 Return: +26.46%
NASDAQ Composite Return: +43.89%
Russell 2000: +27.17%
S&P Midcap 400: +37.38%

The VIX ended the month at 19.47 and the VXN ended at 20.52.  These low numbers (when compared to the past few years) make premiums lower and make it tougher to pull in the big gains as an option seller.  And this is an improvement over what we saw less than a week ago when the VIX hit levels not seen since late August 2008.  Don’t let this slip past you.  That’s about a month before the markets started their nose dive.  I mention this to point out the reason for my current 70%+ cash position at the end of 2009.  Selling options at these levels means getting smaller premiums which are likely to increase soon as volatility increases and the complacency turns to fear and more selling of equities.  That means any options