How to Get More Income (and More Safety) from the Markets. — May 14, 2017
Investors take advantage of 3 major ways to generate income from the market; dividends from bonds or stocks, pure stock dividend strategies, or preferred stock plays where the yield is higher than a normal stock dividend strategy but maintains the possibility of capital growth.
But there is another way to pull income from the markets – a time tested strategy utilized by market billionaires, pension funds and sophisticated investors but unknown to most investors. This investment has massively outperformed the S&P 500 over nearly 30 years while taking about 30% less risk than typical market investment.
It’s known as option writing. ACI has an option writing portfolio known as Market Income Portfolio. I will use the real-life results from Market Income over the most recent 6 months to demonstrate the effectiveness of the method of investment.
In the last 6 months (November 2016 – April 2017) Market Income Portfolio has generated an +8.16% net income stream on the average monthly value on the portfolio.
You read that right. +8.16%. In 6 months.
This is how it breaks down:
Capital Gains on Stock: +3.44%
Options Premium: +4.65%
Total % Income Return: +8.84%
Total Net Income Return: +8.16%
These gains help offset any sector or stock specific unrealized losses due to market movements. Thanks to the income above, Market Income portfolio returned +3.46% for the period despite significant unrealized losses in 2 of the sectors it is currently invested in – Retail and Financials (down -10.1% and 5.5% respectively.) Together these sectors account for about 31% of the portfolio.
What should be really interesting to investors is that both sectors continue to produce better than dividend income for the portfolio despite being well below the purchase point.
Over the same time period the SPY (S&P 500) returned 12.8%, but only 1.1% of that was income (dividends).
Contrast this to a typical stock portfolio’s ability to generate income and offset market downdrafts.
ACI’s Market Income Portfolio is modeled off the BXM (Buy/Write) Index. BXM has been trackable since 1989. It’s worth noting, Market Income has outperformed the BXM Index each year since it was broken out into a separate portfolio.
I’ve compared the BXM Index (green) with the S&P 500 (blue) from January 1989 to December 2016 in the chart below. As you can see, over time the extra income created by this style of investment makes a huge difference, not only in long term return, but in terms of offsetting losses when the market get choppy or sells off aggressively.
Investment managers look at a lot of data to determine how to invest, and one of the main things investment managers keep an eye on is risk. This strategy typically takes about 30% less risk than normal stock investments.
So, steadier returns, better downside management, and less risk than just investing in index and sector funds.
If you are above 40, that probably sounds like a pretty good deal.
Here are so more articles on the subject if you’d like to understand more;
Want to see how ACI Market Income Portfolio has done over the last 10 years? CLICK HERE.
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*Net income stream does not account for taxes that may be due on taxable accounts. Please see additional disclosures on www.aciwealth.com at page bottom.
Additional Disclosures regarding hypothetical illustrations:
It is not possible to invest directly in an index. The above hypothetical chart makes the assumption that an investor can mimic the strategy of the BXM index using a dividend yielding S&P 500 index tracking fund. This discounts the emotional impact events might have on an investor and makes assumptions with the benefit of hindsight. The illustration does not take into consideration the impact of management fees on the S&P 500, the 60/40 Stock/Bond portfolio, or the hypothetical Buy/Write with dividends portfolio prior to 2014. From 2014 on ACI’s Market Income Portfolio’s live results including fees has been substituted for the BXM index, which is when ACI begin tracking the Market Income strategy as a distinct portfolio. As of this writing, ACI’s Market Income has significantly outperformed both the BXM index and the S&P 500 with less risk since inception to date. Past performance is no guarantee of future results.
There are inherent limitations in hypothetical or model results as the securities are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could have has an impact on the manager’s decision making if the hypothetical portfolios were real. Hypothetical performance is shown for illustrative purposes only and should not be interpreted as an indication of performance of any ACI portfolio.
Click the disclosure buttons at the bottom of the page to view additional disclosures.