Happy New Year! As school recommences for 2012, I bet many parents (me included) are relieved that the holidays are finally over and we can resume our normal lives. The start of a new year is always a good time to reflect on the previous year and to make plans for the year ahead. Hence I would like to take this opportunity to share some of my reflections of 2011 and what are some of my plans are for 2012.

Looking back, last year was a transition year for me. Just as my youngest child who started secondary school was becoming more independent, I thought I would finally have more time to pursue my own interests. I tried starting a new career in financial planning but that did not quite work out. In hindsight, I am glad that door is closed as I really don’t think I could be happy working as a financial planner with sales targets. With aging parents who are becoming more dependent and needing more care and support, I also appreciate the flexibility of not being tied down to a job. When my mum had a medical emergency in March, none of my siblings with jobs could take the time off work to help look after her. In the past 12 months, I made 3 trips and spent over 3 months with them. Supporting my parents interrupted some of my own plans but I gained a lot of new insights on planning for retirement which I believe will help us plan better for our own retirement.

In the second half of last year I decided to build my own business around the things I am passionate about which are investing and building financial security. During my own journey to becoming a self-directed investor, I spent a lot of money on expensive courses which I felt over promised and under delivered. A lot of these courses were imported from the US and were not tailored to fit the local market. I wanted to provide cost effective training courses to teach practical investment skills which can work in the Australian market. Last year I developed a training course to teach the low risk income strategies that we have been using for our SMSF since 2008. The results from the pilot program have been very encouraging and this year I will be focusing on improving the course and providing more support for students. One of the things that I will be doing to support students is to start another blog which will solely focus on trading these strategies. Personally, I believe these strategies will do very well in the next few years but I realise that not everyone is equally interested and excited about these options based income strategies as I am! This “SMSF Investment Strategies” blog will focus on general SMSF strategies to support new SMSF trustees and those looking to start their own SMSF whereas the new “Low Risk Income” blog will go into a lot more detail on our income strategies to support those who are interested in generating additional income from their stock portfolios.

Kingsley and I will be reviewing our SMSF’s investment strategy over this weekend. It has been quite a while since our last review which was in September 2010. We normally do a review once a year but last year just flew by with little real economic change! I will share our thoughts in my next post. When did you last review your investment strategy? Does your investment strategy need an update for 2012?

Christina McDonald

Volatility is the only thing we can be certain of today. The crazy price action in the past 3 months is enough to make any prudent investor want to stay away from the stock market.  However, if we take a closer look at the market action, we can still find some safe investment strategies using stocks and options. Below is a table showing the gains and losses in ASX 200 sectors in the last 3 months:

The first thing you notice is that not all sectors are equally volatile. The defensive sectors (shaded in green) are hardly affected by the volatility. Some stocks in these sectors pay a good amount of fully franked dividends as well. Buying a defensive sector stock like Telstra seems like a no brainer. At the price of $3.28 per share it still has a dividend yield of 8.5% or 12% if you include franking credits, which is twice what we can get from cash.  For those of us who know options, this yield can be further improved by selling covered calls.

Another observation I have made from the above table is that big falls tend to be followed by sharp rallies in the volatile sectors (shaded in blue). Another strategy that I am currently pursuing is selling out of the money (OTM) put options on fundamentally good stocks in volatile sectors after a major correction. I will walk through an example of such a trade using BHP, which I think most would agree is a fundamentally good stock in the volatile materials sector. By looking at the chart of BHP (shown below), we can see that there is strong support for BHP at $34 i.e. BHP tends to rally whenever it falls to $34.

When the price of BHP comes close to this support level, I would look at selling put options at that strike price. At today’s price of $35.76, I can collect a premium of $1.12 for selling a BHP put option at the strike price of $34 which expires on 23 February 2012 as shown below.

 Source: E*TRADE

The most likely outcome in February 2012 is that BHP will be trading above $34 by that time and my put options will expire worthless and I get to keep the $1.12 premium.   This is a 3% return in 3 months or an annualised return of 12% which is a similar return to what I can get from Telstra dividends. Unlike doing covered calls, I do not need to own stocks to sell puts. The puts are secured by cash which I can keep in a high interest bearing account while waiting for my puts to expire. Based on the current Usaver interest rate, the bank interest can add another 6% return to this strategy. Selling puts does have risks and the risk is that I will have to buy BHP stocks at $34 if the buyers of my put options choose to exercise their right to sell their shares at that price. I need to make sure I have the cash to buy the BHP shares if that happens. For me buying BHP shares at a cost of $32.88 ($34 for the shares less the $1.12 option premium collected) is a risk I am prepared to take.

Selling OTM puts is my preferred options strategy for stocks that do not pay much dividends. There is not much point in holding these stocks in bearish / sideways markets when there is little chance of capital appreciation. I wholeheartedly agree with Aaron Gurwitz, the chief investment officer of Barclays Wealth that selling covered calls on stocks you own and selling puts on stocks you don’t mind owning are good strategies for this “directionless volatile” market.

These option strategies are not hard to learn. One of my pilot students who is a stock investor with no previous knowledge of options is already doing live trades a few weeks after he started the course. He was diligent in watching the training videos and putting into action what he learned. He has already generated more than enough income to cover his mentoring fees in his first month.

My next intake for mentoring on these low risk income strategies will be in February 2012. If you would like more information on this, please send an email to christina@lowriskincome.net.

As this may be my last post for the year, I would like to wish all my readers a Merry Christmas and a Happy 2012!

Christina McDonald

I was surprised by last week’s announcement by the major central banks to pump liquidity into the global financial system so I spent a fair bit of time on the weekend researching to find out the reason behind this unexpected move.  While it is common knowledge that European banks were experiencing an onset of a credit crunch, I don’t think anyone really thought things were that bad to require not just one but six central banks to intervene. Perhaps the European Central Bank has already shot their “bazooka”  in previous announcements and now need help from other central banks to create more “shock and awe” to help markets regain confidence. Some blogs have reported rumours that a major European bank was about to collapse last week so this liquidity measure was to prevent another 2008 style credit disaster which was sparked off by the collapse of Lehman Brothers. I guess we will never know how close we came to the brink of another credit disaster last week.

This announcement caught many traders off guard so the initial reaction is of course to cover any short positions which resulted in a massive rally on Wednesday. As market participants had more time to digest this, I think many are coming to the conclusion that things may be worse than we thought and euphoria had given way to caution by Friday. The major US indexes had an early pop (thanks to an unemployment number of below 9%) which fizzled throughout the day resulting in a gravestone doji pattern on the daily charts as shown below of the S&P 500 index. This pattern frequently reflects the exhaustion of an uptrend, like what we saw in September.

While the chart pattern in stocks is still inconclusive, the picture in currencies is clearer. The US dollar index ($DXY) which has been in an uptrend since September only fell 1% (compared to the 5% up move in stocks) after the Nov 30 announcement and most of this move has already been retraced as shown by the big bullish candle on Friday in the chart below. The flight to safety trend is still very much intact.

December is normally a bullish month and the rally could continue to year end. However, I have not found enough reason to close my bearish bets yet.

Thursday the 24th of November was Thanksgiving Day and this year we had something very special to be thankful for, as it was also settlement day for the last of our investment properties and the proceeds from the sale was enough to pay off our home mortgage. When we prepared our 10 year goals in 2005, one of our goals was to own our home outright by 2011 and we have managed to achieve that goal. Being completely debt free is a wonderful feeling, and it is another step towards a worry free retirement. In Part 1, I mentioned that the key to feeling secure is having income that exceeds our expenses. In Part 2, I suggested a few ways to increase income and today I would like to share some of my thoughts on reducing expenses, without compromising on your quality of life. Reducing debt is one way of reducing your expenses. Without mortgage payments, our living expenses will be significantly reduced and we can increase our contributions to super with the extra cash.

The good news is you do not need a lot of money to have a happy life. Last week a friend of mine attended the funeral of a 96 year old lady from our church and she thought this lady’s life was a good example of a life well lived. My friend could see that this lady was well loved by all her children and grandchildren and she was living with one of her children when she died. She helped her children care for their children when they were young, and built strong bonds with them by doing that. She endeared herself to everyone by helping them in whatever way she could. My friend always wondered how this old lady was always able to remember her name so well and very touched to find out that it was because she prays for my friend every day. I don’t think this old lady had much money but her life seems so much richer and fuller than many who may be materially more well off than her.

That lady reminded me of my maternal grandmother who was a homemaker all of her life so she never had much money, but everyone loved her and some of my happiest childhood memories were Sundays at her house. Her kids and grand kids would drop by her house every Sunday to visit her and to catch up with each other. My grandmother was a great cook and a keen gardener. She was always busy in her kitchen or garden and there was always something yummy to eat at her house. She had 35 grand kids so she had to have a schedule for the grand kids to have sleepovers at her house. I could not wait for my turn to stay at my grandma’s house as there was always fun activities to do which would include simple pleasures like feeding her fish, killing snails in her vege patch or making cookies and other goodies for Christmas and Chinese New Year.

My parents chose a totally different path for their retirement. They turned down offers from the children to live with them or close to them, preferring to move far away from the children to be with their own retirement community. They spent their time doing leisure activities with other retirees. They refuse to have anything to do with new technology like mobile phone and computers and live in their own time warped world. None of their grand children really know them as they only see their grandparents once every few years, and have no idea how to relate with them. If I had to choose between my mum’s and my grandmother’s model for retirement, I would choose my grandmother’s model for myself.

Kingsley and I are saving responsibly for our retirement and at the rate we are going, we should have a pretty decent amount in super by the time we are ready to retire. By converting this into annuities progressively as described in Part 2, we should have a decent income stream to live on comfortably when we can no longer work. However, we do not know what will happen in the future. Ralph Norris, the outgoing CBA chief executive warned recently that a GFC II is on its way and no one knows what the final outcome of this will be. Deflation could erode the value of our assets or inflation could erode the purchasing power of our cash. Even if that happens, I am pretty confident we can still have a rich and happy life as long as we have good health and good relationships with our loved ones, just like the two role models I mentioned earlier.  Our picture of a happy retirement is not just about having lots of money to enjoy ourselves. It includes supporting our family and our community in whatever way we can. If we have more than we need, we would like to bless others financially. If we don’t, hopefully our kids (or grand kids) would be happy for us to move in with them. Without a mortgage or bills to worry about, even the aged pension should be enough to live on pretty comfortably, so we don’t have to worry about becoming a financial burden to them or having to eat dog food, ever.

Christina McDonald

Short-term traders have been watching the triangle pattern on the daily chart of the SPX (see chart below) for the last few weeks and this has clearly been resolved to the downside, with prices not only breaking below the triangle but even breaching the 50 day moving average. This quite clearly signals the end to the October rally, so is this going to be another short-term correction like August or something more?

I decided to look at the longer term charts (see 5 year SPX chart below) for more clues. It looks like the August correction was the first break of the 29 month uptrend line. Frequently, there is a rally back to test the back side of the uptrend line and if that fails, it means the end of that trend. Despite a few scary corrections, we have been in a bull market since March 2009. The sideways market from January to July 2011 formed a “head and shoulders” which is a classic topping pattern, similar to what we saw from April to December 2007. Prices broke below the “neckline” in August 2011 (and Dec 2007). There was a short rally back to neckline but when that failed, it started a new downtrend which lasted for months. With the latest developments, it looks like we may be starting a new downtrend, which may last for months.

Of course the bears could be wrong again and many bears (myself included) have been frustrated by reserve bank interventions before. The markets did a U turn in September 2010 after QE2 was announced. This time the correction has been due to the problems in Europe and now everyone expects the European Central Bank to do exactly what Ben Bernanke did in QE2. The least painful solution to the European debt mess is for the ECB to buy European government bonds which amounts to printing euros. Despite loudly claiming they will do no such thing, the ECB has been quietly increasing their bond purchases to keep the bond yields down (and confidence up). I had to think about what the implications would be to the stock market if the ECB did this. The euro will probably fall, just as the US dollar did when the US printing presses were turned on. If the euro falls, this should mean the US dollar would go up. When the USD fell, commodities and stocks which were priced in USD went up so if the reverse happens with the USD, we should see these assets fall which means the US stock market should go lower.  The Australian market tends to follow the US market so it would most likely go down as well.

From my own analysis, which was supported by a Confirmed Down market call from Vector Vest for the US market on Nov 17, I feel confident enough to add to my bearish positions (with a tight stop) even though I am suffering a bit from bear fatigue. For those who agree with the above and want to hedge or profit from a falling market, check out my previous post How your SMSF can profit when the market goes down. Stay safe!

- Christina McDonald

Kingsley and I started doing our 10 year goals in 2005. We had very ambitious financial goals which included having a stock portfolio worth $1.5 million and a property portfolio worth $2.5 million because we thought this was what we would need to be financially secure.  We saved aggressively by putting $50,000 into super every year. We also invested aggressively and borrowed as much money as we could to purchase investment properties.  We bought investment properties instead of our own home as it was more tax effective. The result of doing this was a lot of stress and we would worry whenever we did not have tenants in the rental property as cash flow was very tight. We were also not happy renting as we really wanted to have our own home. I started to wonder if it was worth having such a stressful life in the present just so we can have a comfortable life in the future.

Then I read a book that radically changed my views on retirement planning and financial security. The book was written by Stephen Pollan, an American financial advisor and had a rather negative sounding title called “Die Broke”. The author challenged the conventional thinking that we all had to stop working at a specific age. If we are doing a job we like, why should stop working just because we reach a certain age? Warren Buffet and Rupert Murdoch are still actively running in their businesses in their eighties. Both these men can easily afford to retire but they continue to work as they obviously enjoy it. If we work for an organisation, we may be forced to retire at a certain age, but there is no reason why we cannot do something else that we enjoy to generate active income as long as we are healthy enough to work. Doing something that is mentally stimulating is also good for our mental health and we cannot imagine spending our retirement just doing leisure activities like playing golf while waiting for the dividends and interest to be paid into our bank accounts. The author recommends working for as long as you can, doing work that you enjoy, and scaling down your work progressively e.g. by reducing your hours of work as you grow older. To make up for the lost income from working, he suggests turning a portion of your retirement capital into an income stream by buying an annuity.

For us, we decided we would start our own business in something we are passionate about and will continue to work in the business for as long as we are able. As investing is our passion, we want to build a business in investing to generate a consistent income for ourselves, and helping others to do the same so they can achieve financial security for themselves. Starting a business does not necessarily require a lot of money. For a small amount of capital, you can start an internet business selling information products in a niche that you are passionate about like this guy who turned his interest and passion about herbs into a business (http://www.learningherbs.com) that comfortably supports his family. If running a business does not appeal to you and you cannot find a job because of your age, you can always do volunteer work. Non-profit organisations will always welcome your contributions. I had a lot of fun using my IT skills to teach computer classes for senior citizens in a community learning centre in my neighbourhood.  If you are over 55, you might even qualify for Newstart allowance if you do more than 15 hours per week of volunteer work. If you do not think you have any skills, you can host a homestay student. As long as you can cook a hot meal a day, you can the turn the spare bedroom in your house into a tax free income of $250 per week after the kids move out.

The author also challenged the conventional wisdom of building up a huge nest egg so we can live off the yield during retirement and then leaving the capital to our children after we die. If we die at the normal life expectancy which is in our eighties, our children would be in their fifties or sixties. Getting a big inheritance then would not be as helpful to them compared to getting some financial help when they start out in life. I know I would prefer my parents to help me with a deposit to buy my first car or home, rather than leave me an inheritance when they die. If we adopt the Die Broke recommendation to consume capital by progressively converting it into annuity income streams, we will need a lot less capital to live comfortably right up to the end, so we do not need to be too obsessed with having a huge nest egg. Annuity income also makes a lot of sense as it is a low stress method of getting a consistent income as long as we are alive. We don’t need to worry about outliving our money or being cheated of our money especially if our mental capacity deteriorates. Financial abuse of the elderly is more common than we think, and this is currently my biggest fear for my parents who suffer from dementia.

As mentioned Part 1, the key to financial security is having income that exceeds your expenses and that is true at whatever age. Today, I hope I have given you some simple ideas for generating extra income, and how you can maximise your income even if you have a small amount of super when you retire. Next week, I will share some practical ideas on how we can reduce our expenses and still enjoy a comfortable life.

- Christina McDonald

I am tired of the fear mongering about not having enough super to retire on. When I was working at the bank I would cringe every time I heard my colleagues echo what they had been told by the financial planners which was “if you don’t have at least $2 million dollars, you will be eating dog food when you retire”. Someone I met this week told me that she heard on a radio program that you need at least $800,000. If you are like most people and have a lot less than this in your super, I have good news for you which is you don’t need that much super to have a comfortable retirement. For a more realistic estimate of what you need, read “A comfortable retirement: How much super is enough?” on the Superguide website.  According to this article, a couple can have a comfortable retirement income with just $480K to $840K of super, if we include receiving the age pension. In my Financial Planning course, I learned that there are actually 3 pillars in Australia’s retirement income system and they are:

1. A tax-payer funded means-tested age pension
2. A minimum level of compulsory employer super contributions; and
3. Voluntary private superannuation and other savings

The first pillar is actually the age pension and not super but this is often not factored in the retirement planning calculators like the ones found on the websites of some retail super funds. Don’t worry, your savings will not run out 18 years before you are expected to die (see chart below) which is what I got when I modeled retiring at age 60 with a $500,000 capital and a 5% annual return.

If you want to use a retirement calculator, use one that does factor in the age pension like the calculators on ASIC’s moneysmart website. Although we do not want to rely on getting the age pension, remember it is there to supplement your income if you cannot save enough in your super.

Most retirement planning tools focus on how much capital you need to have when you retire but just having a big sum in super will not help you achieve a worry free retirement. If you don’t know what sort of income you can get from your capital you will constantly worry about outliving your money.  If Retiree A has $1 million dollars of capital but only knows how to get a 3% annual return on his capital, then his income will be only $30,000 per year so he will not feel any richer or more secure than Retiree B who has half the amount of capital but knows how to generate a 6% annual return who will both have the same retirement income. Neither Retiree A or B will feel secure if they both need more than $30,000 per year to live on because this means they have to draw on their capital which will in turn reduce their income the following year.

To really feel secure and be worry free, you need to know

1. How much income you need each year to live comfortably; and
2. How much income you can safely and consistently generate from your capital

For example, if you need $50,000 per year to live comfortably and you know how to generate a 12 per cent return per year consistently, then you will feel quite secure once you have a capital of $500,000. This is because you will be able to generate an income of $60,000 per year which is more than enough to cover your living expenses. The key to financial security is in knowing how to generate a consistent return on your capital, and you will feel secure once you have saved sufficient capital to produce the retirement income you desire. This is why my passion is to look for investment strategies that can generate a good consistent income and I have spent most of my past 7 years doing this. My “Holy Grail” is to achieve a consistent 40% return per year as this means a person with a mere $200,000 capital will be able to generate an $80,000 income per year which should be a pretty comfortable income. Of course I have not found this Holy Grail yet but I am pretty comfortable that I already know how to generate a consistent income of 10-15% per year.

As a worry free retirement is something that Kingsley and I aspire to achieve, this is one of our favourite topics of discussion.  I would like to share some of our ideas in the next few articles on this topic. As our picture of an ideal retirement include being healthy both physically and mentally, we see ourselves doing something useful with our time and skills for as long as we can even after we retire. Our plans for retirement income extend beyond the typical ones of living off income from interest and dividends. Feel free to chip in any time with your own ideas – we would love to hear from you.

I started writing this post from the Kuching airport, after a ten day visit to my parent’s house. This visit is vastly different from my last one in March this year when I first discovered the full extent of my parents’ dementia. After the initial shock, all the siblings have put our heads together to work out a sustainable solution to accommodate my parents’ wishes to continue to live at home in Kuching which is my mum’s hometown. There were many heated discussions in the past seven months as each sibling had different views on what is the best solution but when all parties are reasonable and sincerely want to achieve a common goal which in this case is our parents’ happiness in their golden years, a solution can be worked out. Things were humming along nicely in their household when I arrived, with only a few minor hiccups which I was able to sort out quite easily.

Thanks to the internet and broadband, the world has become a lot smaller. Despite being in what felt like a remote corner of the earth, it was quite easy for me to keep in touch with my family and pilot students in Australia through Skype and email. I was also able to keep up with what was going on in the world – from the daily dramas in the European debt crisis to Kim Kardashian’s ill-fated marriage to Kris Humphries. I can see similarities between these two problems. In many ways, the Eurozone is like a bad marriage between spenders (like Greece) and savers (like Germany) who are trying to stay together for the sake of the children (the Euro). Kim has already decided to divorce her husband after 72 days of marriage. Will Greece do the same? George Soros gives the latest Eurozone deal at most three months. I think it is quite clear that a proper default (not the kind where private investors are forced to take a “voluntary” 50% haircut, public investors only take a 21% one, and credit default swap sellers get away scot free as this not considered a credit event) is inevitable. As Barry Ritholtz said “let the normal capitalistic process of failure run its course”. The question is whether Greece will be allowed to do that due to fear of a contagion effect, but in reality contagion has already started.. When private investors saw what happened to private holders of Greek debt, they are naturally fearful of holding other European debt which led to the collapse of foreign investors like US broker MF Global. Although they were not directly affected by the Greek haircut, they became a casualty due to their exposure to debt of other high risk European countries such as Belgium, Italy, Spain, Portugal and Ireland. I cannot remember who said this but one commentator said “the medicine may be more toxic than the problem” as again we see how another quick band aid solution always has unintended consequences.

The real solution for Greece is probably to do what Iceland did which is to hit the reset button so they can start afresh again. After the initial pain experienced by their banks (and their creditors) who made risky bets, Iceland is on the road to recovery, unlike Ireland which is still languishing because they decided to bail out their banks at the taxpayer’s expense. “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.” If Greece takes this path, there will be a lot of pain for their creditors which include the banks of other European countries. If the Greek referendum was allowed to proceed, the people would have most likely chosen the Icelandic solution but that has been called off at least for now, it looks like we have to wait for the latest band aid solution to fail. If George Soros is right, it may not even last as long as Kim Kardashian’s marriage. For a real lasting solution to the European debt crisis, there must be a common goal that all parties are prepared to work towards achieving.

A number of events in recent days have made me reflect on our conventional thinking of growth vs income assets. Growth assets such as stocks and properties have always been associated with savvy investors who dare to take risks and are usually rewarded with bigger returns. Income assets are usually associated with risk averse investors who stick with safe assets which provide poor returns. A few weeks ago, we sold the last of our investment property for four times the purchase price or a 300% profit. It sure sounds like a fantastic investment return but was it really? It took twenty years for the property to reach this price so this works out to be only a 7.3% annual return, before tax.

Investors tend only to remember the purchase price of growth assets. If the current value of our asset is more than our purchase price, we are happy and we do not really think about whether it is a good investment or not, based on an annual percentage return. Below is a 20 year chart of BHP. In October 1991, you could have purchased BHP for around $15 per share. Based on today’s price of around $36 per share, this investment would have unrealised capital gains of 140% but an annual return of only 4.5%. BHP also pays a small dividend but if it did not (like a lot of other mining companies), this annual return is comparable with the typical return of a long-term government bond!

New investors are naturally attracted to growth stocks as they offer the potential of huge capital gains like what we saw in 2003 to 2007. But “growth” can be both positive and negative. Investors who bought BHP shares in 2001 or 2008 would have had a scary ride as they watch the value of their investment fall 50% and had to wait 3-4 years just to “break even” again. When I first started investing, I spent a lot of time looking for stocks that would provide large capital gains but now I tend to look for good annual returns on capital invested. For example, an investment in a good income stock which provides a steady 4-5% fully franked dividend would have outperformed an investment in BHP even if the share price of that income stock remained unchanged over the 20 years.

A common criticism of income investments is regarding the need to pay tax on income whereas capital gains are not taxed unless you sell your investments. Accountants especially tend to focus on the tax implications but isn’t it better to realise a profit and pay tax on it than to watch unrealised profits disappear when prices fall? I always remember the advice of one of our investment mentors who said “Paying tax is a good problem to have”, because the only time you pay tax is when you have made money – something we often forget, so simple and yet so true. The best way to manage tax is to keep your investments in a tax friendly environment such as a super fund or a trust. I prefer to pay small amounts of tax on earned income rather than a huge capital gains bill at the end. We will have to pay a large amount of capital gains tax from the sale of this investment property and this has held us back from selling earlier. In hind sight, it was probably not a good decision to delay the sale as we probably would have got a better price earlier this year and saved on paying interest to the banks. Ah well, hopefully we will learn from the mistakes in this investment and make sure we don’t make the same ones in our next one.

Digressing slightly from this topic  … I would like to thank my readers for the fantastic response to my pilot program.  At this stage, I am going to close this while I work through this and use the feedback to improve the program.  Stay tuned as we head towards a formal launch in February 2012.

We have finally completed the last of the training videos and our Options for Stock Investors training program is now ready for pilot testing. We would like to invite our blog readers who wish to learn the options strategies that we have successfully used in our SMSF to be part of our pilot testing team. Our strategies focus on how to use options for managing risk and generating extra income from a stock portfolio.

Risk Management

• Learn how to protect your entire stock portfolio in market corrections
• Learn how to use put options to provide a guaranteed stop loss
• Learn how to protect unrealised capital gains
• Learn how to hedge stocks that do not have options
• Learn when to hedge and when to remove your hedge
• Learn different ways of managing risk using both put and call options

Income Generation

• Learn how to generate extra income from your stocks by selling covered calls on stocks which have options
• Learn to generate extra income from cash in the bank while waiting to buy stocks at a discount by selling put options.

Many thanks to my dearest husband Kingsley who has sacrificed his weekends (and Top Gear viewing time) to help me produce the training videos and to fix up the training website. Thank you to all readers who have written in to enquire about the pilot program since I first mentioned it in my Learn, Do and Teach post. From the feedback received, I realise that I need to clarify 1) what the pre-requisites are for doing this training program 2) what is expected from pilot students and 3) how much it will cost.

Pre-requisites

The only pre-requisite is that you are already a stock investor i.e. you know how to buy and sell shares and you understand the risks of owning shares. We teach both risk management and income strategies in the program. If you are only interested in the risk management strategies, there is no recommended minimum trading capital as all you will need is a small amount of money to buy put options to protect stocks that you already own. However, if you would like to learn to trade the income strategies, we do recommend that you start with a minimum trading capital of $30,000 because of the high commissions involved in trading options in Australia. If you wish to do covered calls on a $30 share like CSL, you only need $3,000 to buy 100 shares to sell one option contract. You may receive $100 in options premium from selling one call contract but the minimum commission is around $35-45 per trade. Hence, if you only sell one contract, most of the income received will be eaten away by commissions, which does not make sense financially. However, if you buy 300 shares and sell 3 contracts, you will receive $300 of premium so your commissions will only cost you 10-15% of the income received. We recommend a minimum capital of $30,000 to enable you to practice doing the strategies over 3 stocks with a $10,000 allocation for each stock. However, you can always start with a smaller capital if you just want to learn the concepts and are happy to treat commissions as part of the cost of your education.

What we expect from pilot students

All we expect from pilot students is your time to familiarise yourself with Exchange Traded Options by reading some materials from the ASX website, watching the training videos and to giving us your feedback. Your feedback is invaluable to us as it helps us understand what students need and where the training gaps are. If you like our training program, we would appreciate a testimonial and your permission for us to use it on our website for advertising purposes.

How much it will cost

There is no cost for the online training program (i.e. ASX training and our training videos) for pilot students. However, if you wish to have personal mentoring which includes a one-on-one session per week, the cost is $1000 for 3 months of mentoring and we are offering a 20% discount for pilot students. Mentoring is a pretty flexible arrangement based on student needs and could include reviewing your current portfolio to work out appropriate strategies, reviewing your investment or trading plan, and of course providing handholding when you start trading with real money. There is no need to travel to Melbourne for mentoring as I have found it can be done quite effectively using video conferencing tools like Skype.

There are limited places available so do let me ASAP by sending an email to Christina@lowriskincome.net if you would like to participate in the pilot test. You will be given a student ID and password once we get your agreement to our non-disclosure request.