It's important that trading stocks should be "part of a balanced breakfast", in terms of your personal saving and wealth. This meaning, that it should represent some, but not all, of how you're managing your personal wealth.
With the market at massive highs right now, a lot of people are yielding major crop with their personal wealth, and I've found that when you're making money it's easy to become complacent, sit back, and loosen the reins a little bit on your personal money stash.
This article's purpose is to remind you that just when you think you're raking it in quicker than you ever have, there's also ways to grow your personal wealth even more aggressively. Here's six fundamentals that are often covered and written about, combined to give you a grand slam move to kick start (or ramp up) your saving and net worth.
1. Balance Your Macro Portfolio, Then Balance Your Investment Portfolio
First, you have the portfolio of where you keep your money as a whole. Diversifying here means keeping a cash position, keeping some in asset funds and stable bonds, having your investment account, hedges like precious metals or precious metal ETFs like (GLD) and (SLV), and assets. By diversifying your macro portfolio, you're hedging without even knowing it; keeping your money in different instruments creates redundancy which helps mitigate risks.
Then, you have your actual investment portfolio. QTR recommends consumer staple stocks and stocks that seem to be recession proof, like Johnson & Johnson (JNJ), as well as Proctor & Gamble (PG). Consistent dividend payers (and raisers) like Coca-Cola (KO) and dividend rookies like Apple (AAPL) and Dunkin Donuts.
Here's three examples of hypothetical portfolios, something I started to touch on in a previous article:
Bearish on the Market Future:
- Small 5%-10% long position in staple stocks [American Capital Agency (AGNC), NuStar Energy (NS), ACCO Brands (ACCO)]
- Medium sized position in actual gold or silver bullion
- Medium sized cash position in FDIC insured account or in person
- Small position in volatility ETFs and ETNs (like VXX) to be traded in the very short term
- Small long positions in gold and silver trusts
- Medium sized long positions in inflation-adjusted Treasuries (AAA rated)
Balanced Outlook on Market Future:
- Small long positions in silver and gold, as broad market hedges using iShares Silver Trust, SPDR Gold Trust
- Small long positions in bullish ETFs, for short term swings like S&P SPDR ETF Trust SPY
- Small positions in bond ETFs, as broad market hedges, like iShares Barclays Aggregate Bond Fund (AGG)
- Large long positions in big dividend payers [AT&T (T), Coca-Cola (KO) , Apple (AAPL)]
- Sector wide hedges for these by short positions like [Verizon (VZ), PepsiCo (PEP), Intel (INTC)]
- Long positions in smaller companies with growth potential (companies that have crazy beta or pay no attention to what the market is doing as a whole).
- Short positions in companies who do not seem fundamentally sound [like J.C. Penney (JCP), Radio Shack (RSH), Sears (SHLD)]
Extremely Bullish on Market Future Portfolio:
- Small position in bonds
- Large long position in large cap dividend payers [like T, KO, 3M (MMM)]
- Large long position in tech heavy staples [like Microsoft (MSFT), Google (GOOG), INTC, Cisco (CSCO)]
- Large long position in sector ETFs like Energy Select Sector ETF (XLE), Financial Select Sector ETF (XLF), Healthcare SPDR ETF (XLV)
- Large long position in small to mid cap up-and-comers with growth potential [Natural Gas Services (NGS), Kona Grill (KONA), AMC Networks (AMCX)]
- Small long position in biotech and other micro-caps/speculative [Celsion (CLSN), Cellceutix (CTIX.OB), Fannie Mae (FNMA.OB)]
- Small bullish options positions in major Dow (DIA) and S&P SPY Components
2. Pay Yourself First - As Much as You Possibly Can
The trick here is saving in a fashion where you don't even know you're saving. Most savings accounts now either have a auto-draft feature that allows them to draw from your bank account on payday - or you have the option of actually just doing a direct deposit of some percentage to your savings account. Find as much as you can possible ramp up this withholding, without putting you or your family in poor living conditions - then, like the Showtime grill - set it and forget it. Learn to run your life off of the remainder leftover each paycheck. You're paying yourself first, which may feel uncomfortable at first, but will change your life when you look back over a year and see how much stacks up (even with the horrible compounding interest rates). Compounding interest is a very cool thing.
Again, you have to run your life like you would run a business. As I've stated before:
Draw up your own personal cash flow statement and take a good hard look on the money you have coming in, and where it goes out. One of the first lessons of saving I ever learned was "pay yourself first". That means, set yourself up either on a 401k or automatic savings plan where money is deducted from your paycheck every single week without ever giving you the opportunity to see it, spend it, or take it out of an ATM that charges $7.50 fees drunk on a Tuesday at a casino in Vegas after drinking 16 Miller Lites (we've all been there, right?).
I started at saving 10% per pay, but have been able to walk that up to near 25% by reducing my fixed costs and keeping my variable costs on a monthly and yearly basis to a minimum. As your pay grows commensurate with how much you work (hopefully), this can make it easier to save larger amounts.
3. Pay Off Debt
Your net worth is calculated, basically, like a balance sheet. You have your assets - bank accounts, investment accounts, 401k, physical assets - and, your liabilities - mortgages, credit cards, car loans, etc.
Just like in a business, there's two ways to increase your net worth (or net profit); you can either choose to bring in more money, or cut your expenses and liabilities as low as possible.
Eliminating debt not only frees up room on the back end of your personal balance sheet, it gives you tremendous piece of mind, which will in turn, help you make clearer decisions moving forward with your money.
4. Cash Position
Having a cash position in both an FDIC insured account, as well as somewhere personally where it's accessible in case of emergencies, is extremely important.
The benefits of carrying a cash position include:
- access to little, albeit some, interest
- dry powder for future investments
- liquidity in cash of emergency
As I stated in my article "4 Steps to Prevent Your Own Personal Cyprus":
When saving, make sure you physically have some cash or gold put away. This doesn't have to be a massive amount, just a tangible amount that adds another style of diversifying to add to your repertoire. While this may seem like a conspiracy theorist's version of how to save, large money managers usually have put aside some capital that they can physically get to in an emergency situation. It won't accrue interest, but you'll know exactly where it is and how to get to it.
In "My Definitive 17 Cardinal Rules for Investing Success", I noted the importance of hedging:
In life, we hedge. We carry car insurance, homeowners insurance and life insurance. We want to be prepared for type of disaster that life may throw at us. It's important to take this concept and carry it over to your investing portfolio.
Methods of Hedging
There are countless numbers of ways to hedge, using ETFs, stock positions and options.
Against a long position, one might acquire cheap premium put options to protect against the value of the equity that one is holding.
Against a short position, one might buy vanilla calls or write puts.
Ahead of a binary event, one might play an options strangle or straddle, even in conjunction with taking a position in the equity
Sector-wise, diversification. Money spread across several sectors protects against an industry crippling event.
Money-wise, more diversification. Utilize bonds, funds, stocks, options, futures and commodities to make sure your style doesn't get too aggressive or conservative. Maintain balance.
When hedging, it's important to understand your potential loss in each situation. There are no real situations where you're guaranteed to make money, unless you're already in the money on a position. Things like options spreads offer the feel of guaranteed wins sometimes, but the seductive nature of those positions often leads to people scratching their head when occasionally their entire position is wiped out. Do your research.
It's critical to hedge the funds you have invested in stocks, as they are usually never insured. A loss is a loss, a gain is a gain - unrealized or realized.
You can invest this way by using any of the above strategies; puts against a long position, calls or writing puts against a short position, investing spreads ahead of binary events, and sector-wide and money-wise diversification.
More commonly, using put options and GTC orders (sometimes) is a great way to "insure" your long position. Just don't forget, puts expire and cost a premium and GTC orders can get blown past and automatically converted to market orders on catastrophically bad (or good) news.
6. Keep Personal Overhead Low
The falls in line with the "balance sheet of your life" advice. Essentially, like a company, you have a cash burn per week/month/year. The lower you keep this number, the more bread you have at the end of the day to stash away.
The second thing you need to do is trim your overhead to as slim as possible so that the amount you can save is considerable, while still leaving yourself money for everyday expenses. Examine all of your bills, cut out what you absolutely don't need, and all of a sudden you have found money.
While I'm not asking you to cancel your internet service and turn off your cell phone; there's a way to scale back across the board that could amount to serious savings. Have you looked into the cell phone minutes that you're not using, but paying for? Do you really need 503 movie channels including the "Latin Bucking Bronco" network and the station that carries third tier Slovakian cricket matches? Does the air conditioner really need to be set at 68 year round? These small cuts can help decrease the amount of money that goes out.
I hope these 6 items have help put perspective on how you can possible continue to save and build wealth aggressively. In investments and in life, QTR wishes all readers the best of luck.