While New Year’s Resolutions abound and the stock market continues its recovery, it is imperative that investors keep several basic investment rules in mind. As we start, not just a new year but, a new decade – it’s a great time to clean the slate and begin anew. What are some of the common mistakes made by individual investors? Here are ten to keep in mind:

1. Not having enough money on hand for emergencies. No one expects to lose their job or become ill. But it can happen and the financial repercussions can be long-lasting. A prudent strategy is to keep a rainy day fund with enough money in a separate account to cover living expenses for up to six months of income. This fund should be easily accessible in liquid money market instruments and short-term CDs. Once your emergency plan is in place, you are then ready to set up a regular investment plan for your future.

2. Delaying the investment process. This can cause real damage to your financial situation, because time is a great ally when investing. It is easy to procrastinate, but don’t! Even relatively small amounts of money grow rapidly over time. For instance, if you invested $100 per month and earned 8% annually, you’d have $41,965 in 17 years. Sock away $200 at the same rate and your account would grow to $83,929. Establish a goal and work backwards to create your plan (using 4 or 5% annually) and stick to it. Continuing your savings discipline is paramount to your success, especially during troubling economic times.

3. Keeping too little in the stock market. In the wake of the 2008 stock market collapse, many people don’t have enough of their money invested in stocks and related investments. That’s unfortunate. While stocks go up and down, history has shown that they perform well over time. Stocks, as measured by the S&P 500 have generated annual returns of about 9.5% for the past 39 years. There were many occasions during those four decades when the markets looked rather shaky, but for those that stayed invested – it paid off.

4. Paying too much in taxes. Millions of Americans could cut their tax bill each year if they would take the time to learn the current codes or work with a qualified tax professional. Here’s good way to cut yours: Contribute as much as possible to your company retirement plan. Too many people have reduced or stopped their contributions because of the declines they witnessed in 2008. Dollar-cost-averaging into a weak market is a good way for long-term investors to accumulate investments at lower prices. You may also be eligible for a tax deduction on the contributions and your earnings will grow tax-deferred. In 2010, it would also be advisable to consider a conversion to a Roth IRA. For many people, this move can be advantageous – check with your financial advisor to see if it makes sense for you.

5. Buying yesterday’s winners. Ever notice how last year’s best investments rarely turn out to be this year’s winners? Avoid buying a security just because it has been rising rapidly in recent months. Before investing in anything, evaluate its potential for continuing the positive trend. It seems obvious – yet so many folks chase the high flyers and end up “buying high” instead of “buying low”.

6. Not focusing on fundamentals. Sometimes investors get caught up in the excitement of the market, buying when things seem hot and selling when there is panic in the market. This is called investing on emotion. It is not a recommended practice because it leads investors to buy high and sell low. Another way to avoid this is to own Index Funds – perhaps instead of trying to pick a handful of great stocks – you would be better off in the long run if you owned every stock.

7. Forgetting to rebalance your accounts. At the start of 2009, rebalancing meant adding to your equity positions after a major decline. This idea goes against common sense and is often the hardest thing to do for the individual investor. It was Sir John Templeton who advised “buying when there was blood in the street.” It always seems crazy at the time but works more often than it doesn’t as long as you are adding to quality investments or the major indices. The recent run-up in the equity markets since the March lows may have tilted your portfolio the other way. If you find yourself overweighted in a particular sector or asset class – rebalance and take some profits off the table. And yes – that may mean moving a little money into something that does not look very exciting like bonds or cash.

8. Being unprepared. Many investors make an investment believing it will only go up in value. Sadly, sometimes stocks go down – they don’t always go up. Be prepared for the opposite to occur – when it does, you are more likely to consider the decline an opportunity to increase your position of a quality investment or an index at lower prices. If you’re investing in more speculative individual stocks – a good practice is to always have a stop loss in place on every position to help limit your downside exposure.

9. Failing to get professional guidance. If you’re like most individuals, you don’t have the time and experience to monitor the financial markets and make decisions based on intensive research. When you have the guidance of a full-time investment professional, you may increase your profit potential and reduce your portfolio’s risk.

10. Not “renting” your stocks or funds. One technique that you may want to explore in the new decade is the art of covered call selling. Selling covered calls is a conservative strategy that many use to generate additional cash-flow on their portfolios. There are a handful of firms throughout the country that specialize in helping clients maximize monthly income streams from their existing portfolios. This is similar to renting your investment real estate for passive income. Do yourself a favor and learn about this in 2010 – stop leaving money on the table!

I recently found a useful tool offered by iShares, called the Correlation Calculator. After plugging in your portfolio, it lists how Exchange Traded Funds perform relative to your existing investments. Some move positively in the same direction, while others move in opposite directions. This highlights one of the pillars of intelligent investing, diversification. When constructing an investment portfolio, one cannot afford to overlook diversification. When compiling an investment portfolio, correlation and standard deviation are vital considerations. First, you want to choose investments that don’t always move in the same direction. If they do, you really haven’t diversified. For example, if two investments have a correlation of 1, they move identically. When one goes up 5%, so does the other. And when one falls 5%, so does the other. A correlation of -1 means they move in completely opposite directions (good for diversification!). And when they have a correlation of 0, they have no relationship. One investment goes down, while the other plays golf.

Now let’s consider standard deviation. It sounds very technical but all it really means is how much am I going to sweat while holding this investment? The higher the standard deviation, the more you’ll sweat. Using the same correlation tool from iShares, it gives you the standard deviation of your portfolio, as well as the standard deviation of a list of ETFs as well. We got very excited when we saw that our portfolio actually has a lower standard deviation than the Treasury Inflation Protected ETF (TIP) over the past 3 years. It has also returned over 15% over the past three years, with annual rebalancing, while the S&P 500 has lost around 16%. Also worth mentioning, these numbers do not reflect the covered call overlay that we implement on each of the ETFs in our model, so the standard deviation would be even lower!
Analyzing the standard deviation of your portfolio as well as the correlation between the investments inside your portfolio will help you become more diversified and sweat less. Save the perspiration for the gym!

It is not always about being the biggest. It’s about always striving to be the best. It is never being comfortable with the status quo. It’s seeking new challenges. It’s setting a standard of performance that inspires our partners and challenges our competitors. Being a leader is a lot tougher than being a follower. If you are looking for an investment manager who will share your commitment to leadership, work with us. Capital Wealth Planning is now taking on new clients and we would be happy to discuss how we may improve your personal financial situation. We believe a solid investment program enhances personal wealth by increasing both growth and income – consistent with each client’s risk tolerance and unique objectives. Once we fully understand your goals, we will recommend a suitable investment program and monitor it on an ongoing basis.

While some brokerage firms will pay lip service to option strategies for their clients who request it – at Capital Wealth Planning, we specialize in only one thing: Covered Calls on ETFs. All positions are continually monitored and integrated with our enhanced income system. This is what we do best! Our professionals dedicate themselves to watching the option markets and utilizing all relevant data to maximize our strategies. Capital Wealth Planning’s primary focus on monthly covered calls offers many advantages over traditional call writing methods.

Most importantly our wish for each of you in this new year and new decade, of course, is that you will benefit financially from this exciting new year. But even more, our hope for you is Peace, Good Health and Much Happiness!

Wishing you a Bullish New Year!

At Capital Wealth Planning, we utilize a mathematical foundation to our covered call selling strategy.  Using Black Scholes and various other Option Pricing Models, our proprietary system analyzes critical market data on an on-going basis to manage our covered call positions while complimenting our clients’ long term goals and risk tolerance.  This sophisticated covered call selling process enhances the return on the underlying portfolio.  The success of this strategy is largely dependent upon our proprietary monthly program.

Our experience has shown that most of us acquire investment accounts instead of effectively building investment portfolios.  The differences may be subtle, but they are important.

The first difference involves long-term planning.  To build a portfolio, you need a long-term vision of what you are trying to accomplish and how it should be constructed to achieve the desired results.  In acquiring a portfolio, we tend to make investment decisions based upon today’s goal or today’s emotion.  Too often, we buy things we shouldn’t own or sell things at exactly the wrong time.

Second, when we acquire portfolios, we usually end up with several investment accounts (individual, joint, IRA, 401k, pension/profit sharing, etc.)  that are managed independently, without regard to the investments contained in the other accounts.  This leads to improper asset allocation, poor tax planning, over-concentrations and higher risk exposure than necessary for the return we receive.  Proper building is designed to avoid this problem.

Finally, once acquired, many of these investments take on lives of their own.  While their overall make-up changes with management changes, market conditions, product cycles, financial conditions, consolidations, divestitures, and legislation, they are left to grow or stagnate – without review.

Part of our job  is to help you grow your assets and protect your family’s financial well being.  Let us help you build those portfolios, increase your understanding of what you own, and help you plan where you are going.  We look forward to talking with you soon.

I received a great question yesterday regarding SH (ProShares Short S&P 500 ETF) and its inefficiencies.  For anyone who has owned this ETF, you know what I’ve been struggling with for two years.  Because we are not short term traders, – we know enough to stay away from anything that is leveraged (by that I mean ultras, 2x’s, 3x’s etc.)  But we do have SH in the portfolio and I admit that SH is negatively affected by slippage.  My position is that despite its limited efficiency – it works for our model.  In a sharp downturn, it should go up.  Proportionately?  I doubt it – but it doesn’t have to for its inclusion.  The effect it has on the standard deviation (assuming it moves in the right direction – again, I submit to you that the inefficiency exists) – as long as it moves in the right direction – justifies it as a small piece of a larger portfolio.  We use bonds and cash to further reduce our risk exposure.  Selling monthly calls on SH limits its drag in an up market.  It may not support the slippage, but it helps. Therefore, it works great for the limited roll that we use it for.  To offer an alternative – an investor could hedge the market by buying longer term puts – a strategy that works as an  insurance plan.  Alternatively, one could short the market itself at whatever percentages were appropriate to provide the proper protection.  Either of these techniques will act as a hedge against a drop in the market for those sophisticated enough to implement them.  We consciously give up a little efficiency using SH because it is a good covered call candidate, and its benefits outweigh its costs.

I had lunch with a good friend yesterday who is a very successful individual.  We get together every couple weeks to discuss option strategies, the markets in general, and overall portfolio management.

Covered call selling and protective puts were the major topic of conversation, but towards the end, we began to discuss asset allocation. (For those that aren’t aware – I run an allocated model of ETFs with a monthly covered call overlay.)  Asset allocation is not just an occasional idea that you should glance over or plug into some efficiency software.

Just like you sell a covered call every month – you need to rebalance your portfolios regularly.  We’ve seen a big run in the DJIA since the March lows.  Now is the time to be rebalancing your assets – not after the market has a pullback.  In our portfolio, it is often as simple as selling a little SPY (the long S&P 500 Index) and buying a few shares of SH (the inverse of the S&P 500 Index).  This technique forces you to take a small profit off the table while things are up, and then moving those assets into something that has gotten a bit less expensive.  It’s hard to buy low and sell high.  This strategy allows you to do just that month after month in reaction to market moves.  Remember, we are making no predictions – we are simply responding to market volatility.  The concept goes hand in hand with consistent covered call selling. 

I’m disappointed that we aren’t going to see a game 7 tonight. Congratulations to the Yankees.  To the Phillies -Thanks for a great season!

Monthly Covered Call sellers go through a bit of a cyclical calendar whereby the week before and the week following option expiration seem to be a bit more hectic than the 2 weeks in between (in this case 3 weeks).

Our portfolios are well positioned. Our calls are written to our satisfaction. Our clocks are ticking. So what are we doing? Great question. This week we manually review and run all of the approximately 840 Exchange Traded Funds through our proprietary evolution matrix. We are looking to find ETFs that are highly option-able and we are also looking for any changes in ranking from last month.  This process is very labor intensive, but it is this data that gives us an edge over other money managers.

Next week I will begin to discuss the ETF universe and what constitutes a good candidate for our model portfolio.  Please note that the VIX is still hovering around 29.90 – uncertainty abounds.

The Phillies squeaked out a win last night to extend the World Series another game. Down 3 games to 2 heading back to New York, looks like an uphill climb for the fight’n Phils – but I remain optimistic. (I take little solace in the Eagles whipping of the Giants on Sunday)

It wasn’t just the calendar turning to October 31^st that illustrated the fear on Wall Street.  The VIX (the CBOE Volatility Index) posted its largest one-day gain in a year.  Today’s close of 30.69 is the highest we’ve seen the VIX  since July.  More importantly, look at the one-week chart.

 Why is this important?

Historically, the VIX often moves in the opposite direction of the S&P 500 as option premiums are raised.

Want proof?

Look at today’s broad market declines:

DJIA: -249.85  -2.5%

S&P 500:  -29.92  -2.81%

NYSE:  -215.86    -3.10%

VIX:  +5.93    + 23.95%

What does that tell us?

It tells us that investors are concerned that the 3.5% increase in the GDP may not be sustainable.  Additionally, the recent decline in commodity prices has many traders scratching their heads.

Can the VIX stay above 30?

Short-term – I would expect it to pull back a little (it’s funny how quickly we forget 2008).  While it’s up like  this, however, I recommend taking this opportunity to write covered calls on any inverse ETFs you own.  (We own SH – the S&P 500 inverse in our portfolios.)

 My son is dressing up as Chase Utley, the Philadelphia Phillies second baseman, tomorrow night.  The series is tied 1 – 1.  Stay tuned.

Okay – When we left off yesterday we had bought back our November 53 calls for 5 cents to close out our option position.  XME has increased by $2.50 today (currently 44.80, still down from $48 and change last week).  We have just sold November 48 calls for 70 cents.  This means we brought an additional 70 cents per share of premiums in to our accounts.  This may not sound like much – but think about it.  We came off of $48 and the “buy and hold” investor is sitting at  $44.80 down $3.20 per share.  Alternatively, the “covered call seller” also came of $48, but we locked in our 75 cents from yesterday PLUS our 70 cents today minimizing our decline to only $1.75 per share.  Convinced yet?  We cannot control the price fluctuations of our underlying holdings , but we can maximize our cash-flow by actively selling covered calls.  We do this every month on every holding – believe me, it adds up!

We’ve also re-entered the other closed positions from yesterday in similar fashion.  To be included in our e-mail list, please sign up here or e-mail me directly at kevin@covered-call.com and we can provide you with our trades every month.  Good Trading!

(No, I didn’t forget about the Phillies – we still have 3 more to win and I still have my fingers crossed – GO PHILS!)

With the recent pullback in the market, we have had a great opportunity to buy back our covered calls that we had sold only a week and a half ago.  Now, why would we buy back our calls?  When the market declines shortly after our covered calls are put on, it creates a profit on the call.  If that profit is substantial enough – we buy back the calls and close the option overlay position.  Sound confusing?  It’s not!  Here’s a real trade we had on:

Last Monday we sold an XME November 53 call for 80 cents (at the time XME was trading around $47 a share) .  Today XME has pulled back to about $43 a share (it’s pulled back with the decline in metals).  We repurchased the call back for 5 cents and captured a 75 cent profit.  Keep in mind that our ETF is still down – while the “buy and hold investor would be down $4 per share (47-43); we are down only $3.25 per share having captured a 75 cent
profit on our covered call.  We closed the position because if the ETF should increase in value, we could sell another November covered call on the same exact position.  Stay tuned to see if we are successful in our strategy – as we still have 3 full weeks in this option cycle. 

Who said selling covered calls was boring?  NOT ME!  We’ve closed out several other ETF option positions hoping to profit in reaction to the market’s volatility.  This is an important concept that I will elaborate on in the future -  the point being:  We do not predict the market – we react to it!

All of this trading is helping the day fly by.  As you all can imagine, I am awaiting the first pitch of tonight’s World Series as my underdog Philadelphia Phillies try to defend their title against the New York Yankees.  Cross your fingers.