2019 – “Year End Finale”

What better picture than one of the most famous Banksy out there to salute year 2019?

General Comment

Well, well… 2019 was quite a great year for stock markets and generally all things financial, it’s in the numbers and it’s now in history.

If you follow my ramblings a little you’d know by now that I still don’t think that there was a real reason for a buoyant market such as the one that we have experienced. But as what I think is of little consequence for this spinning rock that we call mother Earth, we’ll take this 2019 as it came.

Lots has happened of course, probably the most important point that is worth mentioning is the fact that all of a sudden the world seemed to take notice that we might have a “problem” with the environment. I won’t dwell too much onto this topic, but surely it’s a very important issue. How this has impacted my investing style in 2019 was minimal, how it will impact my trades in the future is something that I am reviewing these days.

OPTIONS

Options trades accounted for a net profit of 1507 Euro. The value is falling from the height of 7000 euros of two years ago, but that’s because I have changed the way I operate on the market, especially in 2019 where I had almost no PUT contracts to sell. In reality if we rewind 1 year back in the “Year Finale 2018” post I outlined the new strategy of selling CALLS, and I also wrote how this was going to affect results.

I was spot on with this prediction, so no drama here, I’ve had a lot of rolling to be done this year, effectively losing profits in 2019.

2020 will see no change in strategy for the CALLS, the only tweak is a new screening method where I take into account highs and lows form the past in order to avoid selling a call at historical minimums and see the stock rally bringing the calls “in the money” in a matter of weeks.

The latter incident happened far too often in 2019, resulting in me losing positions that I didn’t really want to sell.

STOCKS

Because of the calls that ended ITM some positions have been called away, some positions have been sold. As I mentioned earlier I wouldn’t have sold some of these positions but the situation was too compromised to be able to roll the trade and salvage it.

The positive side of things is that all the sales brought profit, I could use these profits to close loosing positions, which is always a good thing to do in terms of portfolio maintenance.

DIVIDENDS

Dividends saw a 4,92% increase over last year. I was extremely happy with this result because at a certain point (October) I thought that I was not going to be able to pass 2018 total dividends.

The major reason is that since June I have found very few opportunities where to reinvest dividends and proceeds from sales that I made. And if I sell and don’t buy of course the whole “snowball” effect that a DGI portfolio should have goes up in smoke.

Now that the portfolio is in the 5th year of its life I can’t expect huge dividend growths anymore, so all in all I have no reasons to complain about this result.

When talking about small numbers a mention needs to go to the exchange rate, it does change the final result when almost 75% of the portfolio is not in Euro.

2019 saw an average of 1224 Euro per month, or 40.25 Euro per day worth of dividends. (this figure is gross)

STATS

Let’s take a look at some performance stats!

Linear Growth

It’s a simple comparison Y vs. Y, because I have converted the Portfolio to an index (pretty much like any other investment fund out there), it’s easy to see what was the linear growth in one year. 2019 was a great year, so it was for the LH Portfolio.

CAGR Growth

If I had to look at some stats on Total Return I’d certainly look at this one. Compounded Annual Growth Rate. Again 2019 helped in bumping up quite nicely this figure. Just to give some insight if you invested in my Portfolio 10000 euro at inception, on the first day of 2020 you would have a value of 12301 euro.

This figure is a NET figure, it includes all costs, taxes, commissions and so on. It’s the real amount that you would get on your bank account.

LINEAR GROWTH
2015 vs. 2014-3.45%
2016 vs. 20159.62%
2017 vs. 20162.63%
2018 vs. 2017-6.46%
2019 vs. 201816.38%
CAGR GROWTH
CAGR 1y-3.45%
CAGR 2y3.31%
CAGR 3y3.08%
CAGR 4y0.78%
CAGR 5y4.12%

Yield

As I stressed several times, the actual Total Return of the portfolio is quite uninteresting to me right now, as the plan is to keep investing to build up a good monthly revenue that will help strengthening my pension (if I ever will see a pension). How much the portfolio yields is much more important to me.

In 2019 the numbers that I can post are the following:

Annual TER (Total expense ratio): 1.35%

Annual Yield (from options and dividends): 4.07%

NET Annual Yield: 2.72%

I have checked with last year, my yield was at 2.70%. It’s a very small increase so there are only reasons to be happy.

Moreover the fact that I am now holding cash (the fund at the time of writing is about 5% liquid), means that the actual dividend yield was smaller than what I could have had if (like in 2018) I kept my funds fully invested.

Target is still 3%, annual yield. It’s going to be hard, I don’t think that 2020 will be “the” year, it might take longer. Unfortunately commissions, taxes and tax return costs deeply affect this result.

The way the portfolio is set up at the moment gives me a yearly Net Yield of 3.105%, so I am already above my target only with dividends, I just need time to cover the ground of the first 2 years when the portfolio wasn’t fully deployed.

Costs and Commissions

When I abandoned my Italian Bank and moved everything to Interactive Brokers, the target I had in mind was to increase trades (I couldn’t do options back then) and reduce the average costs of all commissions/bank related costs.

Despite the fact that I managed to hit the target massively with this move, 2019 was a bad year for my optimization targets. This is due to the fact that I have traded very little, reducing the options killed the averages. Also the people who do all the calculations for my tax returns increased their cost quite substantially.

There are two solutions to this. I might start calculating tax returns by myself and I should increase the number of option trades.

CommissionTradesAvg x Trade
2014€185.0218€10.28
2015€1,110.68109€10.19
2016€851.56406€2.10
2017€1,282.19807€1.59
2018€646.66327€1.98
2019€692.53212€3.27
2020€4.303€1.43
Avg€4,772.941882€2.54

Strategies and Targets for 2020

A. CALLS: I’ll keep the same system as I did in 2019, tweaked with new studies that help me pinpoint potential good spots to sell calls, and not just looking at the premium (25% of 1 year of dividends).

B. PUTS: The dry powder that I am hoarding might serve the purpose of selling some PUTS, but only if prices go down from here, I feel that these valuations are too high, I wouldn’t want to increase at these prices.

C. CURRENCY BALANCE: In 2019 I set a goal to have the EURO portfolio to weight 30% of the total. I failed blatantly ending up at 24.5%. More work is needed here, but it’s a side of the portfolio that needs more attention. Ideally I’d love to have GBP and EUR to weight 30% respectively and 40% USD.

D. CONCENTRATION: It was a target of mine last year, to reduce the number of stocks. I did manage to get 3 out of the way, but 78 positions are still quite a lot. I need to work more on this aspect, i’d be happy to have 75 positions by the end of 2020.

E. DIVIDENDS and YIELD: Surely getting closer to the Annual Net Yield of 3% on one side, and on the dividend side I’d love to be able to hit 16.000 euro total dividends, a bit more than a 5% increase vs. 2019.

F. GREEN INVESTMENTS: I’ll try to add more companies that are engaged in environmentally friendly practices. Looking at some of the names that I have in the Portfolio I am not a very environmentally friendly investor, but I am already looking at some “green companies” (mostly utilities) to add in the future.

Conclusions

I repeat to my self that I still need to see a bear market with this portfolio. How will I perform during one? TECHNICALLY a defensive portfolio such as this one should fall, but not as much as the broader market.

For sure I did not grow as much as the markets have this year, so that part of the strategy I know is right.

Yes you’ve read correctly. This portfolio is not built to beat the market, but to create a stable, growing stream of income and generally have a lower volatility both when growing and when falling.

Focus is on how much money this investment can produce, ideally there will be a point in time when I stop to reinvest and I start to spend this cash, but that point hasn’t arrived yet…

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