Investing my cousin's money. Your opinion
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
8% is phenomenal. If he has been making 8% all along, I would think it is being reviewed for risks. Are there any restrictions on his portfolio, can he pull out and reinvest or is the agreement he has to stay in a certain amount of time and than only take some out at a time?
If he's long in a taxable account he's going to get a tax bill if the stock is called away (I think). The CC profit gets hit at ordinary income (I think). The time value with a week to go is going to be small and you'll have to sell a strike near current prices for it to be worth much of anything- which means getting called away will happen regularly.
A great rip for the advisor flipping out options every week though.
Covered all strategies are as vanilla as options get, but you better know what you're doing.
For the 8%.... Lemmee guess- REITS? Any part of that "return" return of capital?
What fee is he paying on assets for the woman's work? What fee on the investment?
Edited in the "I thinks". Not a tax advisor, not offering financial advice, just making very general observations.
An 8% average is excellent. How old is this cousin? It's fine to play with money like that if you have lots of it (ie more than 360K) and/or you're young. High returns don't come without risk.
If he takes your advice and anything happens to his money (anything from losing money to just not making as much as it would have in his old funds) how pissed would he be with you? I know you two are close and would hate to see the relationship sour because he felt you gave him bad advice that cost him money.
Don't do anything too speculative at his age!!!
8% is damn good. Personally I'd either leave it be or go to Fifelity or Vangard and ask them for low risk suggestions...
Again, his age
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
Vanguard's S&P 500 Index fund returned an avg 7.75% over ten years with low fees and zero sales commissions. I bet it adds up to a better return than paying a salesperson a fee on top of the fund fees. Don't pick stocks. Don't pick mutual funds. Don't pick money managers. They all try to beat the S&P and few do.
Formerlyjerseyjack said:
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
Of course he has risk. Any investment looking for any type of growth is going to have risk. The question is one of comparable risk. Which plan is riskier? To what degree is this risk offset by realistic potential for gain?
The other side of the coin is expenses which can eat away at any profits he might otherwise make. What would your plan do to increase/decrease the fees your cousin is presently paying for portfolio management? If his contract would have a "pay by the trade" component under your proposal, his fees could be greater than any profits he is apt to receive.
As stated above, another factor to consider is the tax liability he would have if he pulled his money out of the funds he is in now to pursue this plan. Depending on his bracket, this could erase a sizable portion of any profits he made over those 15 years.
Formerlyjerseyjack said:
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
You were talking about a covered call strategy for income, now you're talking puts.... You'll end up eating into his money for no reason by constantly hedging him.
What is he invested in now?
joan_crystal said:
Formerlyjerseyjack said:
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
Of course he has risk. Any investment looking for any type of growth is going to have risk. The question is one of comparable risk. Which plan is riskier? To what degree is this risk offset by realistic potential for gain?
The other side of the coin is expenses which can eat away at any profits he might otherwise make. What would your plan do to increase/decrease the fees your cousin is presently paying for portfolio management? If his contract would have a "pay by the trade" component under your proposal, his fees could be greater than any profits he is apt to receive.
As stated above, another factor to consider is the tax liability he would have if he pulled his money out of the funds he is in now to pursue this plan. Depending on his bracket, this could erase a sizable portion of any profits he made over those 15 years.
The money is in an I.R.A. and can be pulled out without penalty. He is over 70. It could also be rolled over into another IRA account.
Management fees would increase but the amount of increase would have to be determined.
Jackson_Fusion said:
Formerlyjerseyjack said:
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
You were talking about a covered call strategy for income, now you're talking puts.... You'll end up eating into his money for no reason by constantly hedging him.
What is he invested in now?
Read the numbers in the original post. Those are concrete specifics.
The puts have a purpose. Again, show me where he loses. If the price of the stock goes up, he earns profit by selling the calls and some profit from the increase in stock price.
If the price of the stock goes down, he earns less but he still earns. His loss in value of stock will be limited to the strike price of the put but he will still be earning profits from selling the calls.
dave said:
Vanguard's S&P 500 Index fund returned an avg 7.75% over ten years with low fees and zero sales commissions. I bet it adds up to a better return than paying a salesperson a fee on top of the fund fees. Don't pick stocks. Don't pick mutual funds. Don't pick money managers. They all try to beat the S&P and few do.
This ^^
Formerlyjerseyjack said:
Jackson_Fusion said:
Formerlyjerseyjack said:
joan_crystal said:
What can go wrong? Have you seen The Big Short? Your cousin is presently getting an excellent return with minimal risk. The financial adviser/broker has been doing a good job of managing these assets for 15 years. Why risk it?
But he does have risk. If/when the market collapses again, he loses for a period of eight or 10 years.... and can lose 40% as happened in 2008. The purpose of a put option is insurance, that he either won't lose or his losses would be substantially limited in this case to 2 or 3 percent.
You were talking about a covered call strategy for income, now you're talking puts.... You'll end up eating into his money for no reason by constantly hedging him.
What is he invested in now?
Read the numbers in the original post. Those are concrete specifics.
The puts have a purpose. Again, show me where he loses. If the price of the stock goes up, he earns profit by selling the calls and some profit from the increase in stock price.
If the price of the stock goes down, he earns less but he still earns. His loss in value of stock will be limited to the strike price of the put but he will still be earning profits from selling the calls.
Given that there are 70k different mutual funds of incredibly differing underlying strategies holding dozens different asset types of various share classes registered under 40 act, "mutual funds earning 8%" is a bit vague.
Puts cost money. When they expire ootm they're worthless and the premium paid is gone. If you're hot for massive income you think you'll make off the calls you sell, play with BSM and model out what the puts will cost with strikes the same distance from current stock value- or -spoiler alert!-just google "put call parity".
What puts and calls are you buying on a mutual fund? How are you going to measure basis risk? Do you plan on liquidating the fund and buying the underlying? Based on what analysis for the long? What stocks are you choosing? FANG stuff as you say in your post? Who doing the delta hedging? How are you measuring your expected return after premium and trading costs? Are you suggesting a collar? Butterfly?
If you are googling any of the above, think hard before running an options strategy on someone else's retirement account.
I agree with all the cautions above. 8% is great but if he is over 70, he should shift some into fixed income to diversify/reduce some of the risk of the worst case outcome that you described (40% short term drop in stocks). Unless he has other significant income (pension?) and this is just "play money"??
in his case, it is almost play money in that he has rental income and income from his business. Please note that I do not intend to make any of the decisions for him. He asked if I knew alternatives and the one in the o.p. seemed interesting.
Formerlyjerseyjack said:
in his case, it is almost play money in that he has rental income and income from his business. Please note that I do not intend to make any of the decisions for him. He asked if I knew alternatives and the one in the o.p. seemed interesting.
There is almost zero chance you'll find an advisor that will execute an options strategy on a qualified pool of money of that size. What you're suggesting would have a hard time making it past the old suitability standard let alone the DOL's fiduciary standard. It is a career ender.
In fact it would make a great screening question for an advisor. "Would you run an options strategy on my 6 figure retirement account? It is a large part of my net worth and I am retired. I don't know much about options so maybe you could just run it?" If the answer is yes, run.
Edit to add: you can do your cuz a tremendous amount of good just by finding out what he owns and what he is paying for it. He's paying at least 2 fees: one on the lady's advice and one on the expenses of the fund itself. Get the ticker symbols and do some research on what share classes he owns. That will tell you a lot about what kind of advisor he's dealing with. Diagnose then treat, if treatment is needed.
I agree with the others about Vanguard. We've been with them for about a year after using a money manager, and we've done very well.
Jackson_Fusion said:
There is almost zero chance you'll find an advisor that will execute an options strategy on a qualified pool of money of that size. What you're suggesting would have a hard time making it past the old suitability standard let alone the DOL's fiduciary standard. It is a career ender.
In fact it would make a great screening question for an advisor. "Would you run an options strategy on my 6 figure retirement account? It is a large part of my net worth and I am retired. I don't know much about options so maybe you could just run it?" If the answer is yes, run.
That makes sense.
Formerlyjerseyjack said:
Jackson_Fusion said:
There is almost zero chance you'll find an advisor that will execute an options strategy on a qualified pool of money of that size. What you're suggesting would have a hard time making it past the old suitability standard let alone the DOL's fiduciary standard. It is a career ender.
In fact it would make a great screening question for an advisor. "Would you run an options strategy on my 6 figure retirement account? It is a large part of my net worth and I am retired. I don't know much about options so maybe you could just run it?" If the answer is yes, run.
That makes sense.
It's amazing how much you'll be able to figure out about what he currently owns. Most financial professionals are not scumbags and will have zero problem telling you whatever you want to know about what they're doing and charging.
You can simply ask, "what fees and charges am I paying, including the underlying fund cost? How am I diversified?" and just let them talk.
Also, if your cousin is "over 70" he needs to take disbursements from a standard IRA once he reaches 70 years and 6 months of age. Otherwise, he will be faced with penalties. This is something to ask his adviser when you meet with them.
Cousin has 360,000 which is being managed by a woman he got off of a radio program, 15 years ago. She put him into mutual funds, average 8% per year and she collects a fee for this service. He has no protection against a severe decline in the stock market such has happened every ten years since 1987.
I am meeting with the two of them next week for the purpose of suggesting that the money be more proactively managed. To wit:
Approximately three years ago, security exchanges began offering options on securities that expire on a weekly basis. Prior to this, options expired on a monthly basis.
Offering options that expire on a weekly basis, opened opportunity for substantial profits while protecting the value of the underlying stock. This is because options that expire on a weekly basis have proportionately higher time value than those that expire over a longer period of time.
This allows the opportunity to sell covered calls, "out of the money" and to do so on a weekly basis. If combined with a purchase of long term, out of the money, put options, the value of the underlying stock will be protected until the expiration of the put contracts. The value of covered calls, (c.c.) is based on volatility of the underlying stock and the proximity of the strike price to the stock price.
This plan should be exercised with stocks that have "quality" and some volatility (beta).
EXAMPLE: Facebook. Price per share, August 18, 2016 = $123.91
Allocating $50,000 towards the stock will allow for the purchase of 400 shares. The August 26, covered call sold for $1.05. The sale of 4 c.c. at $1.05 would generate an income of $420.00.
The price of the January 20, 2017, $120. Put is $6.50 x 400 shares = $2,600.
There are 22 weeks in that cycle until 1/20/17. 22 x .95 (average price of the closest out of the money c.c.) x 400 = (+) $8,360.
CC position would be closed and new CC's sold, every Friday, regardless of the cost of the shares.
Commission for buying to close the C.C. and selling new C.C. for 22 weeks = (-) $308.
Possible decline in value of stock to $120. per share, (strike price of put) -$3.91 per share x 400 = (-) $1,564.
Minimum profit = $6,568.00
My question: What can go wrong?