That's too bad that you didn't pull the trigger on the cash+calls. I've hit the floor on my collars as well - but i was a little more aggressive in setting mine up so I'm only down ~3% right now - they have done their job.
Like you I have an issue in that the entirety of my hedge will expire in June this year and I'll have a decision to make on my re-entry.
My next move will hopefully be to lock in the kinds of returns on equities and bonds that would allow me to confidently retire on a 5% WR or worse. REITs, utilities, and bonds can be had with FCF/price and interest rates in the 7-10% range now, but they all have much further to fall.
The dream would be to jump into the panic at its worst and buy yields/interest that would cover my base expenses. By preserving capital, I now have that possibility! Then if/when volatility calms down get back into S&P exposure with long calls.
You've always had very well thought out thesis on investing and markets in general. I would love to chat more with you about your plan for the above. Because of my puts I'm in the same position of possibly being able jump in at the right time and ride off into the sunset. Any details you can share on how you're thinking of locking in returns for a 5% WR?
Anyway - I'm glad you're doing well.
Thanks
@yoda34. To be clear, I am still down the value of my mortgage, but it could have been much worse, so I’m grateful. I’m glad to hear your collar was tighter! Almost tightened mine in Dec/Jan, but didn’t want to throw more cash at it. Having survived the initial phase of the correction, I find it hard to plot a course ahead for the following reasons:
1) Demographically, all of Western civilization plus the biggest Asian economies look a lot like Japan circa 1990, with a bulge of over-65 people who are all simultaneously entering a low-consumption phase of life. Lowering interest rates might not cause them to buy new cars, oversized houses, electronics, and fashion the way it did in the past. If anything, low rates cause them to hoard more money or sell more assets because their income has been cut.
2) Even 30% down, stocks are still historically overpriced. With a much-improved TTM PE ratio of 18, we still have 17% to fall before we hit the historical median PE of about 15. Bear in mind that most historical studies which validated the 4% rule had starting points much lower than today’s valuations (and all cohorts had a better demographic picture). We might still be in 3% or 2% SWR territory and not know it.
3) COVID-19 has not just slowed but halted large sectors of the economy. That is known. What is not known is how the defaults will start. Will it be corporate bonds, mortgages, or sovereign debt in Italy or Greece? Will a hedge fund collapse, or an investment bank, a bond trading desk, or will it be the regional banks who loaned to local restaurants, theaters, bars, and hotels? A financial crisis seems almost certain to emerge from this. If the infection curve doesn’t flatten, we’re looking at depression - no hyperbole. Even if everyone gave up and lifted restrictions, the death rate alone would shrink the economy.
4) So much of the modern economy is unsuited to disinflationary, high-unemployment conditions. Ford does not manufacture minimalistic cars like in the early 20th century; they sell the F-350 diesel crew cab 4x4 Harley Davidson Edition to office workers who want to project a macho image. Walgreens doesn’t mostly sell medications and necessities, their business is based on cosmetics, fake supplements, and “convenience snacks”. Look around Kroger or WalMart at all the gimmicky things that won’t sell in a depression, and imagine how small the store would need to be to efficiently sell just those things. So much of the economy is luxury, frivolities, and convenience goods. Consider the economies for phone apps, streaming services, advertising, hardware upgrades, and furnishings/decor in a world of 20+% unemployment where people are stretching to buy canned goods. Should I buy an index fund at such a turning point, or pick a portfolio of “necessity” stocks?
It could be that a PE closer to 8 or 10 would be the ideal re-entry point. Yet, the crisis could also be over as quickly as it started if classic public health measures start working in Western countries as they worked in China, or if the emergence of treatments reduces the urgency of social distancing (several pre-existing drugs on the market appear to be curing people.). I won’t catch the bottom, but at some point I’ll build a portfolio with a steady earnings stream.
If the 4% rule was validated on a typical PE ratio of 15, that’s a growing earnings stream of 1/15=6.7%. My screening process would set around 7% as a minimal expected free cash flow to equity / price for stocks, and screen out non-necessity companies and markets with poor transparency. For bonds and preferreds with non-growing income streams, I’d need more like 8-10%. If nothing meets these criteria, I might bide my time selling puts at prices that would.
So bottom line is I have my work cut out. I need to screen for a large (>50) watchlist of stocks and bonds, calculate their new par level of earnings, establish my fair price, and evaluate running a put selling strategy until they get there. I’m looking hard at utilities like CNP, residential and healthcare REITs like EQR and OHI, and, for later in the game, software necessities stocks like CRM and MSFT. I’ll still hold my hedged index fund positions at least until expiration in case the swift rebound scenario happens (always place a side bet on yourself being wrong!). Some of my collars have a year or two remaining, so I can somewhat DCA into a new more-aggressive allocation.
