Well, this is embarrassing…
When we set up this virtual portfolio on April 9th, the idea was to create a portfolio for people like my Mom, who just became a widow, and so many of her friends, who need a relatively safe place to invest their money but would rather not live off the 6% returns generated by the typical retirement fund. Our primary goals in the portfolio is A) Don’t Lose Money, which is Warren Buffett’s Rule #1 of investing and B) To generate a relatively steady monthly income of $4,000 against our $500,000 portfolio (about 10% a year).
Despite the fact that we have allocated less than 40% of our cash, we have accidentally made WAY too much money already and this is NOT the lesson we are trying to teach! What happened is, this past couple of weeks, we had a really nice dip in the markets and our disaster hedges kicked in – as they are supposed to – but our other positions were already well-hedged and well positioned enough that they haven’t really lost anything so we ended up far, far ahead of the curve. While that’s a good thing, obviously, the danger here is getting the wrong idea. We got lucky – and one day we may get unlucky – so let’s keep ourselves grounded and people who are just catching up need to keep in mind that this is not meant to be a get-rich quick portfolio.
If we made too much money on a dip – it’s because we were OVER-hedged and that’s something we will attempt NOT to do in the future. To some extent, it’s a discipline problem for me because I essentially BET that the market would go down and then I BET the market would go back up with our DIA adjustments (as well as overriding our original plan to stop out our new short puts with 30% losses). There was a logic to it because we were only about 25% invested so we had plenty of cash to layer in bullish plays if the market did go up and they we would have rolled our protective shorts (which would have been losing) up to cover. Instead, the shorts paid off and we didn’t have enough bullish positions to hurt us. As we get more invested, we won’t have the luxury of that kind of…
