Investing — Taking Control Part II

Navigating through the Investment Quagmire of 2015–2016

Note: This series documents a quest to find a more successful investment system. I am not an accountant or an economic expert but my husband and I do have 15 years of experience making and recovering from bad investments. See Part I for the details.

My husband and I made the decision to become better educated about all aspects of investments in the summer of 2015. Seeking higher returns with less risk was a priority so we could replace the savings lost over the years and to give younger family members hope that there are viable alternatives to doing nothing with their money.

In our professionally managed account we had preventable losses starting in 2013 because of risky high yield bonds and questionable energy stocks. Our corporate bonds lost a whopping 22% between 2013 and 2015 (which was AFTER our string of losses).

The 2016 investment world is a scary, volatile place but I believe with time and focus it is possible to do as well as the pros, at least for an individual account.

The Good Ol’ Days

I used to feel sorry for my dad because he had a conservative investment strategy led by a traditional investment company which I assumed limited his opportunities. He said once he was happy to get 5% a year which was considerably lower than the 25% we averaged during our Ponzi Neighbor Decade (see Part I). My mom also had a safe approach — investing in mutual funds, CDs at 5% and corporate AAA bonds. After retiring she made weekly trips to the library to see which funds and CDs looked the best and never used a financial advisor until she was 87. Both parents lived well within their means and were able to retire to excellent senior citizen communities. I am thankful that they were both careful with their money and after all of the financial trouble we have had I would happily follow in their footsteps if similar investment vehicles were available now.

Old Rules no Longer Apply

According to a CNBC story, 2015 was the “hardest year to make money in 78 years”. All major U.S. stock indices except Nasdaq had negative returns; hedge fund managers lost 4% and even Warren Buffett’s Berkshire Hathaway was down 11%. Since the “Brexit” vote in June of 2016 stocks have been generally going up but as of October 8, 2016, the roller coaster of global economic uncertainties, super low treasury bonds and CDs, risky higher yield bonds, unstable oil prices, stronger dollar (when did that become a bad thing??) and sluggish real estate could continue indefinitely.

Until recently there were some viable alternatives in economic downturns. It was a nasty surprise when stocks tanked but you could at least buy gold, switch to treasury bonds or finance a house that would appreciate. We need to look for more creative ways to make money safely. And the good news for individuals is that we have access to information and financial products that previously were only available through professional advisors.

Our 2.0 Financial Advisor, An Active Partnership

We don’t want to put financial advisors out of business. We just retired from an industry that is being disrupted by the internet and know how difficult that is to combat. But financial pros must retool to stay in business. So our hope is to explore what works for us and keep a ‘win win’ partnership with a local advisor for as long as they can do some things more successfully or efficiently than we can. We have no patience for firms who push certain products and have potential conflicts of interest. We have stayed with the advisor we had when our bonds decreased by 22% because he shares our concerns and recently left the large firm that gave us all bad advice.

In future articles we will summarize our conclusions about the advantages and disadvantages of working with a local pro but preliminary results are the opposite of what I was expecting — financial resources and experts on the internet are very responsive and accessible — almost 24/7 — whereas our financial advisor is one person with a family who is entitled to a life outside of work. On the other hand, the fees we pay him as a percent of returns are much less than what we paid for our own trading this year.

Conventional Wisdom Sucks

Because we needed to jumpstart our nest-egg leading into retirement years, it was clear that we didn’t fit the typical retirement investor profile of 2015. Here are two assumptions that we disagreed with (and still do a year later):

1. You need to have a higher percentage in bonds and lower percentage in stocks as you get older.

In a future year if we are able to buy AAA GE bonds for a 6–7% yield as we did ten years ago we will reconsider. But in the meantime carefully chosen stocks seem like a safer bet.

2. Options trading has the greatest risk and therefore should be avoided as you approach retirement age.

We disagreed with this too after observing that the small options part of our managed portfolio between 2013 to 2015 had the best record — even after absorbing stock losses from a Walter Energy bankruptcy.

Options Trading on Dough — A DIY Investing System with Promise

Our grand experiment began in August of 2015. We decided to take out $75,000 from our managed portfolio for new, self-directed purposes. The first step was to purchase 3 dividend stocks worth about $50,000 through TD Ameritrade. (By the end of the week those stock prices had declined by 5% which will be covered in the more complete analysis in final 2017 article). Ten weeks later on October 1, 2015, after being immersed in a full time multi-media bath of investing education (details in Part III) we began options trading with the remaining $25,000. We selected the Dough platform started by Tom Sosnoff, the co-founder of Thinkorswim because it was the easiest platform for options trading and with its companion Tastytrade.com provided the most relevant support for beginners. The trades still go through TD Ameritrade but signing up with Dough has the advantage of cheaper fees, at least for options and will help them continue the educational and research support they provide.

One year later we don’t know how the story ends (I’m sure it will keep evolving) but we do have more control over what happens and feel that we have a better chance of success in these uncertain times. We had one significant decline this spring (2016) but most of the loss can be attributed to preventable mistakes. I hope that sharing those rookie options trading moves in Part IV will help others who are on a similar quest. Our plan for 2017 presented in the final article of this series will include a combination of stock picking and options trading and I hope to reduce my time commitment from 40 hours a week to 5 — not because I’m not enjoying all of those hours but because I want to tackle a few other projects.

April 2017 update: As of the beginning of 2017 the Dough trading platform has been replaced by Tastyworks which also has it’s own brokerage firm (it replaced TDAmeritrade). I will review the pros and cons of new system by the end of 2017 or as soon as I am confident of patterns. Immediate advantage is the lower fee schedule — for example to close all types of trades is FREE. There are software advantages of sticking with the Thinkorswim (TOS) platform — the ‘think back’ and analysis capability, ease of setting up different charts, stock activity heat map, mobile trading, etc. — so for now I have divided my former Dough account into two parts. I know that some or all of that TOS functionality will eventually be added to Tastyworks because they have the same team who set up TOS. And with the cheaper fees I expect to close the TDAmeritrade account by the end of the year. We are also staying with our financial advisor for the bigger chunk of our savings and will continue to monitor the advantages and disadvantages of all of the above.