From the looks of the dragging US economy and the mess that is happening in Europe, we may hit another bear market for a while. Here are some strategies I'm taking with my retirement portfolio.
1. I'm getting rid of my mutual funds. Based on some basic analysis it seems that in the last 6 moths most of my mutual funds underperformed the SnP 500 index. Question arises, why hold them?
2. The money I got from cashing my mutual funds are going into SnP 500 (SPY). Why not simply hold cash? Because I could be completely wrong about the bear market, and if the market is flat, at least I'll get the dividend yield (2% is still better then the 0.000001% interest rate in money markets).
3. Buy close to the money puts with three months out expiration on SPY to protect the down potential of the market (Protective Put). However, I'm not buying puts to cover my entire SPY holding, but rather in a ratio of 2 to 3. Puts are expensive, and I'm not looking for total down side protection. I guess another options would be to buy out of the money puts for the entire portfolio, more protection on the deep drop in the market, but total loss of premium if markets slide only a bit.
4. Write covered calls for within a month or month and a half on the SPY holding. This was the main reason to move from mutual funds into SPY or another index. I can write covered calls for income and/or to cover the costs of the puts.
Combining steps 2, 3 and 4 I've created a Collar strategy on my portfolio. Thus we move away from passive buy and pray strategy. If the market tanks, we can sell the puts, and buy more SPY. If the markets stays flat, hopefully dividend + covered calls offset the puts. If the market goes up, we profit (If the market spikes and our covered calls are exercised we still have a profit, as opposed to just being in cash, and simply repurchase the SPY shares at new prices)
Next steps, who to take advantage of the financial melt down in Europe?
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