SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Learn, Do, Teach
We just received the FY2011 financial statements for our SMSF and once again we are very pleased with the returns from our Australian stock portfolio. For the past 3 years, we have been using options to enhance the returns on our stock portfolio using the simple strategies that we have shared on this blog such as:
- Selling put options to generate income and buy stocks at a discount
- Selling call options over our stock portfolio to generate extra income on top of dividends and franking credits
- Buying put options to protect our stock portfolio, as required
Our target rate of return from these strategies is 10-15% per annum. Income includes dividends, franking credits and realised capital gains from stock and options. From what you can see in the table below, we have managed to achieve this target every year, even in the challenging market conditions that we have experienced in the past 3 years. The gross income figures does not include interest earned from capital sitting in cash management accounts which is reserved for buying stocks if our put options get assigned. It also does not include unrealised capital gains or losses. The rate of return is calculated based on gross income over a capital of $120,000 which we set aside for trading these strategies.
We realise that as baby boomers like ourselves approach retirement age, the need to generate regular income in all market conditions becomes increasingly important. Most SMSF trustees know how to invest in blue chip stocks and receive income from dividends and franking credits. By knowing how to sell options over the same type of portfolio, it is very easy to increase the returns by another 4% or more. We have refined our strategies over the years and now feel that I am in the position and have the time to teach them to any other SMSF trustee or prudent stock investor who wishes to learn them.
From what I have learned in my previous life as an organisation change consultant, the best way to successfully learn a new skill is through a combination of training and mentoring. Training can be done through face-to-face workshops or with the advancement in technology; these can be replaced with online courses and webinars. After receiving training, the learner should be exposed to practising their skills in a safe environment e.g. paper trading. The learner can learn by trial and error but learning would be a lot quicker if the learner has a mentor to address his specific training “gaps”. Finally, when the learner is ready to go “live”, the mentor will provide “hand holding” in the initial period and giving the learner confidence, knowing he has someone experienced to turn to in case an unexpected problem comes up.
My favourite success story is when I prepared and helped to execute a training program to teach over 5000 bank employees to use a new core banking system after a bank merger. The program I designed included two weeks of training workshops, work experience at a branch, and post-cutover support by experienced tellers at the branch and a central helpdesk. The new system was rolled out in two stages. Firstly in 2 pilot branches where we learned what we have missed in the training workshops, which we made sure was addressed in subsequent training sessions. When we did the nation-wide rollout of the new system, the CIO of the bank was amazed at how smoothly everything went on the first day. He was in one of the busiest branch in Kuala Lumpur and he said that everything looked like “business as usual”. He was amazed because he knew how complex it was to switch to a new core banking system which he likened to “changing engines of a jet plane in mid-air”.
Proper training and mentoring can make learning a new skill fun and rewarding and you can perform with confidence from day 1. Doing a job without the right skills can be very stressful especially if the consequence of not doing it right are painful, which would be the case if you are learning to trade powerful leveraged instruments like options, CFDs or futures. The consequence of getting it wrong would mean you could lose your hard earned money very quickly! Our own experience in learning to trade options has been long and painful. We started by attending a 3 day Basic Options workshop, proceeded to trade by ourselves and promptly lost money. We then signed up for an advisory service and again lost money. After that I signed up for a training and mentoring program but the mentoring was limited to bringing your broken trade to an instructor who would try to help you fix it but quite often it was too late. Ultimately, it took me a couple of years (and thousands of dollars in training and trading capital “costs”) before I was able to trade options confidently. In 2007-08, I was trading non-directional options strategies on the US market very successfully with an annual return of 40% until the Lehman Brothers crash in Sept 2008. I lost a fair bit of money and my confidence was so damaged that I could not trade confidently for months. I decided to sign up with a mentoring service just before the flash crash in May 2010 and it was great to have a mentor when things went wrong. With his guidance I adjusted my strategies and had the confidence to go back into the market soon after and made back what I lost during the flash crash.
After six years of trading all sorts of options strategies in both the US and Australian markets, I am now ready to teach and mentor others on how to trade options. Our first training and mentoring program is designed for SMSF trustees like ourselves who would consider themselves prudent or conservative stock investors. The main objective of this program is to learn how to use options to generate extra income from a portfolio of blue chip stocks.
The training portion of the program would include using training resources from the ASX. In our opinion, the free online options course on the ASX website covers more than what many options training providers cover in their expensive 1 or 2 day options education workshops. I am also a big fan of e-learning as you can learn at your own pace and there are exercises provided to test your understanding each step of the way. I recently completed my diploma in financial planning by distance learning in two months.
As there are no paper trading facilities provided by our preferred online options brokers in Australia, we plan to develop “How to” training videos on practical trading skills like how to open an options trading account with a broker, how to place a trade, how to read your broker’s options trading statements, etc. The best thing with training videos is that you can watch it as many times as you need, and use it to guide you while you doing it yourself. In 2009, when we wanted to learn how to create websites, we signed up for an online course to do this and found their “how to” training videos very effective in guiding us when we set up our first website.
The mentoring part of the program would include a hands-on one-on-one session per week once students have completed the initial training. Mentoring can be done face-to-face or remotely using video conferencing. All my option mentors are based in the US so with the right technological facilities, distance is not a barrier to effective mentoring.
If you are interested in finding more about our options training and mentoring programs, please visit our “Low Risk Income Strategies” website.
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