2013 was a great year to be an investor. Stocks barely made a move off of their recurring new highs throughout the year, which made it hard not to make money, even for those who sold on dips instead of bought on dips. Every year I question whether or not it’s wise for me to invest the way I do. I wonder if I’d be better off in a buy and hold strategy. Research shows that buy and hold beats active trading for the vast majority who attempt it. Still, I try every year. I took a different look today when reflecting on my 2013 performance.
I did not beat any of the major equity indexes for my full-year returns. The trick is, I shouldn’t be striving for that at my age (42), especially while I’m still working on building my business and cash flow isn’t the best it has ever been for us yet (although it has improved greatly from a year ago). The risk of being 100% invested as a buy and hold investor in SPY would be outright stupid from a risk management perspective. Sure, I’d save on taxes each year until I sold, but the downside risk would be bigger than I should take compared to a diversified portfolio. Instead of comparing my returns to a single index, I looked at what my returns would’ve been if I had a diversified passive portfolio.
A reasonable portfolio at my age and situation could be 55% US stocks, 25% intermediate-term bonds (BND), 10% international stocks, 5% gold (GLD), 5% REITs (VNQ). I ran the numbers based off of what Morningstar showed for 2013 returns on each of these and came up with a 17.01% return. That return doesn’t factor in the dividends that would be taxable. My return for 2013 was 23.92% pre-tax. I had $17,037.30 in realized gains. (This was lower than my paper gains since I carried over some losses from 2012 and then carried over some gains into 2014.) If I subtract our effective tax rate of 17% ($2,896.29) from my realized gains, I’d have a net gain of $20,853.35 (paper gain minus taxes on realized gains). Based on the $100,000 I started with, that’s a 20.85% gain for the year. In other words, not even including the eventual tax on the long-term gains from a buy and hold strategy, I came out nearly 4% better using my active trading approach. I’m more than happy to continue pushing for years like this one by staying active in my investing.
I play a game every year to see what I could use my gains on if I wanted to withdraw it and spend it. In 2012, we spent 10 days in Paris. In 2013, we bought a new car to replace my 11 year old car and paid cash for it. The wisdom of paying cash for a car when interest rates are so low is debatable, but the security of not having a car payment and keeping fixed expenses low was worth it for us.
I ended December with a Net Liquidation Balance (NLB) of $123,749.64 and a Net Asset Value (NAV) of $123,772.12 according to Interactive Brokers (IB) after finishing November with an NLB of $121,942.90. That gave me a gain of $1,806.74 (~1.48%) on paper for December and a realized gain for the month of $1,7037.30 on only three closing trades. I received no dividends in December since I still don’t own shares of any stocks or ETFs. Quicken reported that I have $123,772.12. This matches what I have according to IB. I made it through 2012 with a realized gain every month. In 2013, I had a realized gain in 11 out of the 12 months. It’s going to be hard to maintain this consistency for another year, but if I’m patient with my trades and don’t panic at the wrong times, I should be able to come close.
If all of my naked puts were assigned, I would be 84.28% invested in this account. That’s before the $23,749.64 that I requested be withdrawn today. This withdrawal will reset my account balance to $100,000 to start 2014. After this excess/rebalancing cash is removed from my account, I’ll be 104.3% invested. My SPY February $185 put is the only contract I have in-the-money. My two DIS January $67.50 puts are nearly worthless and I’ll probably close them tomorrow or Monday and add in something new or sell new higher strikes on DIS. I’m considering closing my three IWM January $110 puts early also, but they moved higher today due to the drop in IWM. I might wait them out and be in a position to open some small cap exposure nearly 5% below where it opened the year.
I’d love to see the 2014 start with a 7-10% slide. If we see a good little correction to start the year, it should act as a reset and we can buy on the dip to have another fantastic year. I might add a ratio spread on SPY to try to gain from a small correction and then take an assignment on a put that starts far out-of-the-money. The past couple of years I’ve started the year too under-invested. Maybe this year my caution will pay off and I won’t spend my time chasing indexes, but will be ahead from day one.
The following percentages will be higher after my annual withdrawal. This is my asset allocation in my IB account as of the end of December, pre-withdrawal:
- Large-cap ETF: 29.66%
- Mid-Cap ETFs: 0.0%
- Small-Cap ETF: 38.3%
- International: 6.46%
- Oil: 0.0%
- Individual Stocks & Other Sector ETFs: 10.91%
- Bonds: 0.0%
- Short ETFs: 0.0%
These are my returns according to Quicken through December 31, 2013:
- 2013 Return: +23.92%
- Realized Gain for 2013: $17,037.30
- Average Annual (not cumulative) Return since November 18, 2009 (when I opened my IB account): +7.89%
According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last trading day, December 31, 2013:
- Dow Jones Return: YTD/1 year change +29.65%
- S&P 500 Return: YTD/1 year change +32.39%
- NASDAQ Composite Return: YTD/1 year change +38.32%
- Russell 2000: YTD/1 year change +38.82%
- S&P Midcap 400: YTD/1 year change +33.50%
I don’t usually list returns outside of these major equity indexes, but thought including some widely held ETFs would be interesting for the end of the year review. Bonds and gold didn’t fare so well in 2013. While I lagged the major equity indexes, I was smart enough to avoid bullish trades on these dogs for the past year. I made a small bear trade for a profit on TLT and should’ve gone back for more.
- SHY (1-3 year bond): YTD/1 year change -0.05%
- BND (Intermediate bond): YTD/1 year change -4.74%
- TLT (20-year treasuries): YTD/1 year change -15.94%
- GLD (Gold): YTD/1 year change -28.33%
The VIX ended the month at 13.72 and the VXN ended at 15.44. The VIX finished almost identically to where it was at the end of November, but only after a short-lived move above 16.0. The VXN also moved higher, but stayed a little more elevated. Both indicators are on the lower side of their historical averages, but not at extremes. I expect volatility to heat up some in 2014 as the Fed’s tapering plans progress. This should help option sellers as this important price input rises.