So yeah, 2022 looks likely to be not a good year for my portfolio. Well, it did not pan as well as I wanted it to, or hoped for.
However, that is what it is like for stock investments (some years are good, and some years are not so good). The good times, will kind of take care of themselves.
I reckon when life gives you lemons, make lemonade.
While during the bad times (well for my portfolio), with rising interest rates and rates seeming to stay high for some time, and growth stocks (and dividend stocks included) moving sideways (or down), I have made some minor adjustments to take advantage of the (bad) situation.
Please note these are just my own personal thoughts and might not be suitable for you. Ultimately, the key is to hold on to a diversified portfolio of fundamentally sound stocks. Many would argue that holding on to an ETF that tracks the S&P500 or World index would be better… I do see the merit in that.
Long story short. Basically, I have an unbalanced barbell portfolio. The majority of my holdings are in dividend stocks (Hong Kong and Singapore listed).
Keeping a long-term focus on dividend stocks
It really depends on your priorities and risk appetite. I typically favor dividend stocks (over growth stocks) due to their more moderate price volatility and the predictability of dividends. However, the fundamentals of any stocks (be it growth or dividend stocks) can deteriorate, and ultimately it is worth monitoring and reading up on their earning reports and news pertaining to the underlying companies.
Despite the increasing interest rates, I still believe that long term wise it would be more beneficial and rewarding to stay invested in good dividend stocks, and have taken advantage of any dire news and sharp price drops to purchase more dividend stocks – and will continue doing so from now to 2023.
As mentioned earlier, I should be achieving around $30,000 passive dividend/interest income for 2022.
Getting yields from Growth Stocks
2022 was not a good year for the growth stocks in my portfolio. I do not have many growth stock counters in my portfolio, namely, Alphabet, Mastercard, The Trade Desk, Tencent, and Pinduoduo.
Nevertheless, I still believe in the long-term outlook of these companies.
In the later part of the year, I have regularly sold covered call options for these growth stocks. The 3 counters on which I have sufficient stocks to sell covered call options are Alphabet, Tencent, and Pinduoduo. Among the trio, Pinduoduo’s stock price is the most volatile, which also means a higher premium for the same duration.
My strategy is simple… target is to get a min duration of 1 to 1.5 months or more (till the expiry of the option), and aim for far out strike price (typically it is located at the bottom of the price list or very near the bottom…). In short, not a short duration, and strike prices which have not been within the trading range for the past few months.
This will greatly reduce the probability of the options being assigned. However, it will not eliminate the possibility. There are a few times when I was assigned or was quite close to being assigned. As much as I want to totally mind off from this endeavor, new (and sudden) events or news will cause some anxiety at some point in time. It is not totally passive… and I do not consider them as passive income (more like bets).
However, with a relatively long duration and far-out strike price, the odds technically should be in my favor. Over time it should help out in little ways.
On the flip side, because the strike prices are far out, the premium allocated is not high.. and since the duration is relatively long (more than a month), I cannot do this frequently. In other words, if you are looking for high and fast gains, this strategy is not for you. In fact, it is rather boring and normally it tests my patience (does not help when I see videos or articles touting the high returns from selling options within a short span of time).
On some days, I just put in my sell trade at the limit price and check if my order is filled at the end of the day. If it is not filled, I will just try again the next day (when there is a temporary hyped-up positive sentiment/news causing a spike in stock prices making selling call Options easier and with a better price).
I also need to ensure that the earning report dates of the stocks do not fall within the duration of the call options, as any surprise upside earnings will suddenly supercharge the stock prices. This further limits the frequency of my selling of covered call options.
Also, I can only use this method for highly liquid growth stock options and not dividend stock options. There is little trading liquidity for most dividend stock options… so there are technically no (or very few) buyers willing to purchase far-out strike prices. In fact, in comparison to HK growth stock options, US growth stock options are generally more liquid (or have more price options).
To give you an idea. I sold Alphabet Inc Class A call options on 22 Sept 2022. The stock was trading at around US $100.14 on that day. The call option has a strike price of US $125 (almost a US $ 25 price difference), with the expiry of the option on 21 Oct 2022, almost a month out.
If we look through the 1- year price chart of Alphabet Inc Class A, the highest the price went was around US $148 in Feb 2022. And given the volatility of the stocks and the general downtrend movement of the stock price (and stock market), to have a US $25 upside over a period of a month is low. It is not impossible but improbable. The premium I received from selling 2 lots after the deduction of the fees is only US $14.57 (S$19.65).
Since I am selling covered call options and not naked call options, I have to be totally honest with myself that I do have the underlying stocks to sell the covered call options. Sure I can get by, by selling naked options, but during sudden events or price upswings, I would be unduly stressed as I would be caught without the underlying stocks to sell… why go through that anxiety for that small amount of premium at the beginning? Consequently, this further limits how many call options I can sell. FYI, there are of course other options such as rolling over the options (eg. Close current options at a loss and purchase another one with a later expiry date), but I just don’t really want to have to go through that, given the choice.
From late Aug 2022, the “grand” total premium which I received from the closed/expired Options positions is around S$473 (for around 3 months). It is nothing to shout about, and I am just taking a slow and boring way of earning some spare income while holding on to my growth stocks. In fact, every time I sell these options, I am wondering why would anyone want to buy them. :p…..
The mentality behind this is very different from a trader’s mentality. Increase odds in your favor for small gains, rather than a tiny money outlay, and have a small chance at massive gains. Guess that is what most options traders preach, eg. with just a small cash outlay, one can have a leveraged (control) position in stocks. A small price to pay to limit losses and potentially achieve high rewards.
Imagine you are the casino, and you are selling a dream to the gambler… He will get 10 million dollars, if Micheal Jackson (when he is alive) walks into that casino on that day at noon, go on stage, sing a solo of the Billie Jean song, does his moonwalk, plays roulette, and win the game, and pay the tab for everyone in the bar; while the gambler just needs to pay $100 for such a chance to win that 10 million dollars, more than he can ever earn in his entire lifetime…. (an extreme example) possible but improbable. You get my drift.
Ultimately, over time (long period), with my increased holdings in growth stocks, the premiums received should increase. The same process but just an increase in lot numbers.
I do intend to hold on to my holdings of the growth stocks in my portfolio as I believe they are fundamentally good companies. As mentioned earlier, the fundamentals of any stocks (be it growth or dividend stocks) can deteriorate… so despite this strategy, if the fundamentals of the underlying stock deteriorate it might be more worthwhile to liquidate and look for better growth stocks.
On a side note, I personally tried selling cash-secured put options but found that it kind of tied my liquid cash down. This is because, for the duration of the put options, I need to ensure I have the underlying cash on hand in case the options get assigned (cash which I can’t deploy to purchase other investments should good opportunities arise). Similar to selling naked call options, I do not recommend selling naked put options.
FYI I find StocksCafe useful for tracking my Options positions. If you do not have an account, you can use my referral code: apenquotes. Just click here. Upon signing up using the referral code, you will get to enjoy being a Trial Global Friend of StocksCafe and test out all features for free for one month!
Recycling my Singapore Saving Bonds in my War Chest
I always have this portion of my net worth which I consider my war chest. Instead of leaving it as cash in the bank, I want it to earn some interest while at the same time be fairly liquid.
I find the Singapore Saving Bonds an ideal instrument to do so.
With the rising interest rates, the recent issues of the SSBs have an average (10-year) yield of more than 3%. I have been slowly selling the SSBs bought from 2018 to 2020 and using the refunded money (either cash or SRS) to purchase the more recent issues of the SSBs. I intend to keep doing that to create a bond ladder so that I have interest payments almost monthly.
Overall, this will further increase the yield of my war chest. Having said that, SSBs are not meant for long-term holdings, ultimately the SSBs’ yields cannot surpass the overall inflation rates. They act as short-term war chest funds which can be liquidated and ready to be deployed early next month to take advantage of any good opportunity… while earning some (safe) interest at the same time.
Using my CPF-OA to purchase Singapore Treasury Bills (T-Bills)
Why Every Singaporean Should Apply To Invest Their OA Funds In T-Bill (read here)
Treasury Bills (T-Bills) Singapore Dec 2022 Guide: Latest T-Bills Interest Rate & How To Buy T-Bills in Singapore (read here)
One way to maximize the returns on our Ordinary Account (OA) savings is by investing in higher-yielding Treasury Bills. Like the Singapore Saving Bonds, T-bills are completely backed by the Singapore Government, which has a “AAA” credit rating. This reduces the risks of investing in T-bills to the bare minimum. Singapore is one of only 11 countries in the world that enjoy the “AAA” credit rating! Some other countries include Switzerland, Australia, and Finland.
The floor interest rate for the Ordinary Account is currently 2.5 per cent, and 4 per cent for the Special, MediSave and Retirement (SMRA) accounts.
CPF members get an additional 1 per cent on the first S$60,000 of their combined CPF balances, and those aged 55 and above get another 1 per cent more on their first S$30,000.
Given that the Ordinary Account interest rate is pegged to the three-month average fixed deposit and savings rates of three major local banks – DBS, UOB, and OCBC, it is unlikely that the floor interest rate for the Ordinary Account will rise any time soon.
With the latest T-bills auctioned in November 2022 yielding 3.9%, it presents a unique opportunity to earn higher returns on our CPF OA savings.
Personally, I do not intend to take on much risk with my CPF funds. There are options to use CPF-OA to purchase ETFs (STI or S&P 500), however my preference is for my CPF-OA funds to remain as a risk free (bottom) layer of my overall net worth. Nevertheless, I do not mind swapping CPF-OA funds with another risk free instrument such as T-bills temporarily.
I have recently made a trip down to the bank to bid for the Dec 2022 (6-months) T-bills. Issue code: BS22124H. (Benchmark yield as of 30 Nov 2022: 3.91% p.a.) The auction date is 1 Dec 2022, and the issue date is on 13 Dec 2022.
However, we have to consider that investing in T-bills is an arbitrage opportunity rather than a long-term strategy. In addition:
– You will not get any CPF interest in the month that you apply for the T-Bills
– You will not get any CPF interest in the month that you get the money back from the T-Bills
So effectively, you lose 1 month CPF-OA interest if you buy T-Bills with CPF-OA. This means the T-Bills interest must be high enough to compensate you for the loss of the 1 month CPF-OA interest.
I personally feel that any amount below $50,000 is not worth the effort. Just doing some rough estimation, if I am to invest $100,000 (from my CPF-OA) to a 6 months T-bill (around 3.9% interest rate) I probably can get around $500+ additional interest… eh again not much (nothing to shout about).
By the way, you can also track T-bills using Stockscafe (read here).
I reckon there are other ways to maximize returns on our spare cash in this rising interest rate environment. Shall not go into them here.
Ok the above-mentioned are just some of my actions (or little steps) to take advantage of the situation. These are by no means fast and quick ways for gains… but rather just some slow and small steps. I probably won’t be able to have enticing post titles like “How to make $XXXX in Y days”; and I don’t intend to. I also don’t believe that I am some star investor, but rather am aiming to avoid huge losses and to stay in the investing game for the long term – hoping to slowly snowball my gains.
“Even though most investors see their work as active, assertive, and on the offensive, the reality is and should be that stock and bond investing alike are primarily a defensive process. The great secret for success in long-term investing is to avoid serious losses.”
― Charles D. Ellis, Winning the Loser’s Game: Timeless Strategies for Successful Investing
Thank you for reading.
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