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.
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.
Have questions? Get in touch using the form at the right, the contact button, or simply call the office.
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Process Portfolios, LLC.
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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 or www.dakhartsock.com at page bottom.