A Reader asked a Question

Are you maturing as an investor?

One reader of my blog asked some questions about my transition from investing in a large number of different stocks to fewer stocks and increased allocations to low-cost ETF investments. I like Terry’s reasoning for spending less time on the process and the tasks. He said, “God has been mightily at work ‘encouraging’ me to exit my active investing style as I tend to get far too focused on investing to my detriment.” He also acknowledged he understands my concerns about bonds because of the impacts of inflation on spending power. Essentially, he was asking for my current advice about ETF funds I like. I will share those, but first a bit of a detour.

Because he shared some of his journey with me, I decided to share mine with him. I think I can best sum up my journey in three major phases. Each one was, and is, a learning experience. I believe that if you are still investing the way you did when you started, that it is likely that you didn’t learn anything since then. That, dear reader, is not a wise approach to anything in life.

My Advice for Terry is to Avoid Extremes

Yes, I understand that investing is often something that can consume too much time or consumes no time. Both extremes are, I believe, lacking in discernment. Let me describe what I used to do and what I do now. I am learning how to better manage our investments using less time and gaining more income so that we have more to give away. Social Security covers food and housing. Dividends more than cover everything else.

Phase One: Undisciplined and Expensive 2000-2020

Phase One: Undisciplined and Expensive Investing

The first phase of my journey was during my working years. I had high-cost mutual funds in my traditional 401(k) and far too much in cash or bond mutual fund investments for “safety.” Oh, to be young again so that I could make some different choices! When I left that employer, I rolled the 401(k) into a rollover IRA and gradually sold the mutual funds and started to buy individual stocks.

The Dividend Growth Realization

In the last portion of this phase almost 100% of our assets were various individual stocks with little focus. I had over 300 unique positions spread across six accounts. It didn’t consume my entire day, but I probably spent 3-4 hours per day on our investments when I “retired” from my career in Information Technology. However, even 3-4 hours per day seemed excessive for the value received. There are so many other important things to do that God put in my path. So, my first step was to begin to transition to dividend growth investing so that income could increase while I did nothing other than exercise patience for those positions.

We have owned shares of PFE, ABBV, VLO, and similar stocks that grow their dividends at an acceptable rate. I do not plan to sell these positions as long as they continue to meet the original expectations. Bear in mind that I have considerable skill using Excel, so the time I spend looking at positions can be greatly reduced. I have several formulas that make analysis quick and easy. (Are you learning how to use new tools?)

My transition in phase one was as follows: 1. Very little options trading with an increasing focus on dividend growth. 2. Had some mutual funds. Got rid of them. 3. Had more cash and bonds; decided that was dumb. 4. Did some reading to expand my knowledge. 5. Started experimenting with day trading using a service and traded on Interactive Brokers with a relatively small total account balance. Took too much time and the day-trading service wasn’t all that great in their recommendations. However, it was a learning experience about how price momentum can be leveraged for profit.

Phase Two: Rethinking and Tweaking 2021

Phase Two: Long-Term Thinking and Exploration

In 2020 learned that I could get more income with less work if I had a disciplined, consistent approach. I reduced our holdings to 116 unique positions (stocks and ETFs), not counting open covered call positions. The covered call options positions expire, so they disappear from my account the Friday they expire. 15% of the total value of our accounts is in ETF investments, so I am still between 80-83% individual stocks depending on the current cash balance. To put this in perspective, 15% is over $500k in current value.

During 2021: 1) I gathered and added to 16 ETF investments, including VYM, SCHD, DGRO, PFF, PFFD, QYLD, XYLD, and SHYG. 2) The 100 unique stocks have a very heavy concentration in 22 positions that I probably will hold for the long term. These positions average $60K in size. This group includes ABBV, ABR, AMD, ARCC, AVGO, CM, CSWC, DOW, F, FLGT, FNF, MAIN, MPW, MSFT, NEWT, O, PFE, STX, TD, TXN, and VLO. 3) If you were to examine these, you would find that MAIN and O pay monthly dividends. I have a fair number of BDC (Business Development Company) assets with a focus on the financials as well. ABBV, FLGT, MPW, and PFE are healthcare related. AMD, AVGO, MSFT, STX, and TXN are technology investments.

The biggest change was options trading. So, 4) I add to our income to gain more cash for charitable giving and gifts to family using covered calls and cash covered put options. In 2020 this resulted in $90K of income in about seven months of activity. I spent about 2-3 hours Monday through Friday learning how to do this and then exercising the options trades. So, I was working about 15 hours each week. In other words, I made over $115 per hour trading options during 2020.

As a result of this extra income, we were able to give gifts to various charities, took our oldest granddaughter to Hawaii for two weeks to celebrate her graduation from high school and gave $2K to each of our three oldest grandchildren so that they could open Fidelity Youth Accounts. Then I started teaching them how to invest wisely. More time spent teaching and less time spent investing is a better use of time.

Phase Three is Focus for 2022

PHASE THREE: Not too old to change.

It really isn’t hard. I have five key elements: 1. Continue to add to the ETF holdings. It is very likely that I will only add to VYM, SCHD, and DGRO. I might add more QYLD and XYLD or a similar fund that I am currently exploring. Our largest holding, by far, is VYM. I also think DIA is worth considering. 2. Change the process for trading covered call and cash covered put options so that I only spend 3-4 hours per week on this. I believe I can clear $10K per month trading options. 3. Reduce or eliminate any position that does not have weekly options expirations. Most of the trades I want to do will expire on Friday. However, I do have some productive positions that have monthly expiration dates. 4. Focus on the top 20 stocks as a source of both dividend income and covered call options income. ETFs have limited options appeal. Some do trade monthly, and I have some covered calls on SCHD at the present time. 5. Ignore day trading. Don’t want to waste my time on that.

Phase Four is to Remain Open to Change

PHASE FOUR: Remain open to more change.

The day may come when I will want to stop trading options. Perhaps I will sell most of my individual stocks and take the path Terry is considering. However, I envision phase four to include dividend growth and broad diversification outside of the large cap universe of stocks.

Summary for Terry

Terry doesn’t have to do what I am doing to achieve his goals. I suggested that he stick with his existing holdings in VOO, VYM, and SCHD. He might benefit by adding some DGRO. The key is that he is open to learning and to change. Are you?