Harvesting gains

I was going to title this post, “How I beat the market in 2018”, but that’s not really what this post is about. Plus, I didn’t want to sound like an ass. This post is about being “OK” with spending or using some of your hard earned retirement funds. I’ve seen this done wrong, or where people blow their entire nest egg. Since I was always frugal in building this up, I’m trying to figure out (because it’s necessary for me right now) how to draw down a little bit, in a responsible way.

When I left full time employment 3 years ago now (more on that here) I slowly realized that, even though my wife was employed full time, I was going to need to supplement that income and kick in something.

Warming up to the idea

In 2018, I slowly warmed up to the idea, and accepted that I might have to make a few early withdraws from my retirement funds. With the stock market doing well in 2017 coupled with a lot of volatility in 2018, it made it a little easier to do that. I ended up pulling out $11,050 over the course of the year, but still ended the year with a larger balance than when I started.

These are all caveats that go along with this post:
1. This can be highly risky, so I would never recommend this to any investor without fully understanding the risks and without ample life experience in the markets. I’ve been investing since I was 16 or so, so I have 35 years of observing the ups and downs of the market. That includes significant losses at certain times.
2. For this particular account, I usually keep 60%+ of my total portfolio in CASH and only deploy investment funds when I see a significant change in market conditions.
3. I mostly buy stocks that I’m willing to hold for a LONG time just in case they don’t move in a direction that works for me.

With those “qualifiers”, let’s dig in.

Why cash is King

Above is the graph of my net gain/loss for each month of 2018. I’m not going to get into each and every stock traded but I will say the biggest moves for me in 2018 came from the Volatility index. The volatility index basically moves in the opposite direction as the traditional stock market. (i.e. when the market goes up, the VIX falls and vice versa) I sometimes use that as my hedge when I think the market is going to be volatile. In the 4 or 5 months leading up to my February gain, I was carrying a paper loss on that investment as the markets continued to climb, but it ultimately paid off. So that’s another example of “buying and holding” if I have a conviction that the market is undervaluing or overvaluing a particular stock/index.

Looking back at each monthly statement, I noticed that I had an average of 75% of the portfolio in cash. At the end of June I was in 100% cash briefly. At the end of December I was only 50% in cash.
Two quick comments or observations about this:
1. It’s GREAT to have a cash position when the market tanks, if you know what you want to buy.
2. The other reason it’s great, is that if you have enough cash in your account, you can sell a stock you purchased before the 2 day settlement time. If you’re not aware of this rule, take a look at this description in Investopedia, but in general, as an example, if you have an account with $100K balance, if you purchase $51K of a single stock, then that transaction must settle, which usually takes about 2 or 3 days. If you need to sell it any sooner than that, you must have the same amount of “settled cash” in your account. I’m only pointing this out here, because in volatile markets it’s a real advantage to be able to sell quickly or quicker, if necessary.
3. Finally, it’s just great to have cash. For me, personally, this money is the portion that I’ve decided to use, if necessary. I recently did a somewhat somber post about what you WON’T have if you reach financial independence. Since the bulk of our assets are tied up in retirement funds, it’s become necessary to seriously consider using these funds if a GREAT opportunity arises. That’s not always buying securities. That might be a Stan Lee comic book or a well thought out investment property.

For me, this is an important “mental exercise” because as I’ve moved through my life from poor, to austere, to spending a little, to taking a break….this will be a good exercise for testing out a real world “draw down” strategy. Each stage usually takes some “getting used to”.

What I’ve been doing is making money on a portion of the balance and pulling some funds out and paying the 10% withholding tax along with the realization that there will be additional taxes due on my return this year.

For those who might be here looking for some specific investment advice, I will be detailing some specifics in future posts. However, I can say this in “broad terms”. I consider myself (with this account) a “swing trader”. (sounds kinda sexy actually) This differs from a typical day trader who normally only hold stocks for a single trading day. I make investments, usually after large moves in a particular stock. This is based on my research, and historical patterns of a particular stock. I also watch a lot of “Financial news” while trying to filter out the noise and hype.

So the blue line in the graph above is what my account balance would have been if I were NOT invested in the market, during the 1 year period. Since I drew out $11,050, my balance would have been lower by that amount. However, since I had about 10,500 in net gains plus about $400 in dividends my balance remained at the same level of where it was at the start of the period. I’m aware that there are some downsides to doing this, like short term capital gains and early withdraw taxes that will be due. However, when you need the money, you need the money and for me, this is safest place for it. There are no guarantees in life, but this is really more about the mental aspect of pulling the trigger on a plan to actually use some of the money I’ve worked so hard for. I comment often on this, regarding not being “fully invested”, as when the market tanks, your balance can be less than it would have been if you hadn’t invested at all. Sure the markets usually bounce back, but like I said, “When you need the money, you need the money” and it’s better than booking losses when the market is down, if you intend to use some cash.

Because of investments I made during the downturn in December, I’ve already harvested about $1K in net gains for the new year and I plan on being VERY cautious again this year. I’ll be happy if I can even do half of what I did this year. I’ll be updating this post after I see the effect all this has on our taxes in April.

TAKE AWAY: 1. Make sure you have a “hedge” for when the market eventually takes a downturn. Even if that means carrying your hedge as a loss for a period of time.
2. Don’t be afraid to “take a loss” on your investment. Don’t throw good money after bad by letting a bad investment deteriorate further. Honestly assess your commitment to each investment.

In a hot market, supplementing our income w/ stock gains