2010 Investing Goals

Just as I did last year with my 2009 goals post I’m setting my investing goals for 2010.  At the end of 2009 my account balance was $85,007.52 and I sent a $16,000 deposit in that will be credited this week.  So I’m going to include this deposit for my goal setting purposes and say I’m starting 2010 with $101,007.52 in my account.  When setting goals for this account I like to weigh in a three factors – current balance, growth expectations and additional funding plans.

Over the past three years I’ve gained 26.27%, lost 52.61% and gained 25.49%.  The past two years were odd years to say the least and in 2007 I was trading with a more aggressive style than I’m using today.  That leaves me with a tough way to predict my growth for 2010.  I’d like to think I could repeat the 25% range of growth, but I’m more realistic now than I used to be, so I’ll cut that down a good bit and hopefully surprise myself to the upside.  I plan to beat the S&P 500 this year and if its returns are close to its historic return of 10% (give or take a percentage point depending on how far back you go) I’ll randomly set my goal for 15% although I will do my best to get back up to 25% again.  A 15% gain on top of my starting balance of $101k is $116,150.

As I stated a few times since my 2007 year end review, we have been planning for a new car.  I wanted this account balance to be $100,000 before we diverted funds to the car.  Once I knew I had the deposit ready for this account we finally got around to buying the new car in the final week of 2009 and put down $7,000 on top of the $5,000 I got for my old Honda.  Our car payments are only about $450 per month, but we plan to overpay fairly aggressively most likely.  Ideally my current contract will last another 20 months and we’ll have most of the car paid off by the time I’m looking for new work.  If my new investment advisory business can produce enough income 20 months from now I won’t have to look for a new job and can start managing investments full time.  Without a doubt it’ll be a pay cut from what I’m making now, so we want our fixed expenses as low as possible by that time.  Having low fixed expenses also eases my mind when investing.  If I know I could use the money elsewhere I have a harder time taking a risk.  I’ve always had some of that in my mindset, but that feeling increased in 2008 when I lost what would have been enough to pay cash for the new car in full with some left over.  The point of this tangent is that I plan to send in $1,000 each month starting in March for the rest of the year (my son’s college ESA comes first).  That’ll give me another $10,000 towards my account spread throughout the year.

Without taking into account the time value of my additional deposits, my goal is to have an account balance of $126,000 by December 31, 2010 at a minimum.  The point of all of this planning is to figure out how much I need to average on each trade to reach my goal.  If I need to make $16,000 from growth over the year, not accounting for losing trades, I need to net $1,333.34 per month after accounting for losing trades.  That’s only $310.08 per week.  I could do that with one successful trade per week and no losing trades.  Since I will continue to have losing trades mixed in with my winners this approach is lacking.  Another way to look at it is by account value and how hard I have to make it work for me.  If my average trade has an underlying value of $10k, that gives me the opportunity to make 10 trades per month if I’m only writing nearest month options or five per month if I’m writing second month out options.  $1333.34 divided by 10 trades per month is only $133 per trade or $266 per trade if I’m not sticking to the nearest month and making an average of five trades per month.  I mentioned recently that my plans to switch to writing my options farther out.  This is one of the reasons.  I have a better chance of making five good trades per month than 10 per month.  (I’ll really have to aim for at least seven trades per month or almost two per week to make up for the trades where I lose money.)

If I do this correctly, I’ll have half of my account sitting on expiring options each month.  That will keep me from having all of my eggs in any one month basket which means I’ll stay more heavily invested than I have been the past few months and can benefit from the greater time value in the options I write.  The downside is that time value doesn’t deteriorate as quickly for longer term options, but I have to change something to improve my gains again.  I stand a chance of getting back to the 25% return range if/when we get a good correction and I start investing more aggressively again.  I don’t see a move back to trying to roll my full account every other month, but there’s probably a middle ground I can find that’ll work for me without incurring too much risk.  What you’ll see from me in the very near term is a lot more opening up small positions, just to have some more skin in the game even though I’m expecting a correction.  I’ve been wrong about when the impending correction would get here for a while and should at least have a little more at risk than I do right now.