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Hedging Our Bets

Posted by kdadmin on November 8th, 2013.

If you remember my last email / blog post entitled “Roy Rogers,” I talked about hedging our bets by dumping our ETF’s ahead of the Senate’s news that they decided to avoid default on federal debt. At the end of that day, the S&P 500 finished at about 1733. Since then, it’s been as high as 1772 before it’s slide yesterday to finish at 1747. In other words, it was up as high as 2.2% before dropping back down by 1.32% just yesterday.
Blah, blah, blah. So What? Here’s what:

  1. The ETF’s we sold (IWP, IWM, IJR) are DOWN between 0.5% and 1.5%.
  2. The 20 year bond ETF that we sold over a year ago (TLT) continues to fall and is DOWN 1.0%
  3. The intermediate high yield bond we still own (PHYTX) has been steadily UP by 0.5%.

Hedging Our Bets

Bottom Line: In spite of the fact that we’re carrying a large cash hedge at the moment, we sold our ETF’s at their high for the year, we avoided the “long high quality bond” sophomoric trap, while being rewarded for staying in the high yield sector. AND, we managed to do all this while taking only about 1/3 of the risk of the S&P 500. Bam! (Source: Yahoo Finance.)

While I’m not one to sit in cash for very long, it’s been the right play in the short term. However, with the strong GDP numbers yesterday (which of course has Wall Street spooked because they’re afraid it means the Federal Reserve will reduce their stimulus sooner), and other strong macro indicators, it is shaping up to be a nice time to get back in. (Insert campy “You’ve got to know when to hold ’em …” Kenny Rogers reference here, a la his 1978 music video.)

I still favor shorter term high yields and broad market growth sector exposure to round out our portfolios, but will probably have to do a bit more “Excellent” finger tenting, a la Mr. Burns, before I’m ready.

Speaking of “Excellent” things, I recently helped a client retire at age 53 by taking advantage of Section 72(t) of the IRS code. Imagine that you have the option to take early retirement, but have most of your money in IRA’s or 401k’s and don’t want to pay the 10% early withdrawal penalty to take money out of these accounts. Section 72(t) details how you may have penalty free access to your IRA savings before 59 /12. Chances are you know someone like this. Just think, by simply pointing this out, and introducing this person to us, you could actually help your friend retire early. How wonderful.

Zurich Awes


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