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In 1991 Billy and Akaisha Kaderli retired at the age of 38. Now, into their 3rd decade of this financially independent lifestyle, they invite you to take advantage of their wisdom and experience.

Older and Wiser

Billy Kaderli

As our long-time readers know, we have had our portfolio on autopilot for most of our retirement.  Another body blow to our funds in 2008 served as a wakeup call; one of several in only a few short years since the beginning of that decade. This last shock in 2008 forced me to look at other financial strategies.

I have been investing since the early seventies and worked in the brokerage industry before retiring, but nothing prepared me for what we have recently been going through. The unwinding of a massive debt cycle - first by the public and now by governments - completely changed my investing outlook. With the government and the Fed regularly intervening in the markets only confirmed my beliefs that changes in my financial approach needed to be made. Not to mention that I am getting older and long term investing is getting shorter by the day.

ETF’s have created opportunities

Exchange traded funds, or ETF’s as they are known, have given us user-friendly tools that in the past were much more complicated for both the long and short side of the market. For instance, now you can trade the S&P 500 in real time using the popular SPY (SPDR S&P 500 ETF Trust ) for going long or SH (ProShares Short S&P500 ) on the downside.

 

An extreme example

Let’s say that the market moves up 10%, but then turns down the same amount. If you held your position through this period, your net return is zero. However, if you were able to get out at the top with a ten percent gain using SPY then buying SH (ProShares Short S&P500) to make money on the downside, your net gain would be 20%  - far outperforming the index. Even if you just got out and stayed in cash during the downside move, you would be much better off. ETF’s have created this opportunity of trading in real time as compared to open ended mutual funds where, when you bought or sold, you received the closing price of that day.

You can also leverage positions by using 2-3 times index ETF’s. It works like this: If the S&P 500 goes up or down 1% you can gain 2-3% from the same move using SSO (ProShares Ultra S&P500 )  or BGU (Direxion Daily Large Cap Bull 3x Shares ) on the long side or SDS (ProShares UltraShort S&P500 )  for downside. Conversely your investment will go down by as much if you are wrong. However, if you manage these positions using stops or by monitoring them closely you can enhance your returns.

Yeah, but how do you know the top and bottom?

First of all I am not trying to day trade the market. However, there is some seasonality to the markets that can be advantageous to your portfolio. The saying “sell in May and go away” is a well known strategy. Basically you sell your equities in the spring and buy them back in the fall. Now if you take advantage of the decline in prices through the normally weak summer months using inverse ETF’s you’ve added to your returns.  Again, even if you only went to cash and protected your gains you would be better off than to ride the market back down.

It doesn’t have to be all or nothing

Because I am a conservative investor and I know my risk tolerance, I do this approach with only half of our portfolio. The other half remains invested in the event that the market does not follow the “normal” script. In this way I participate in any gains and limit my losses. Then, when I see opportunities, I use the inverse ETF’s to hedge or protect my long positions zeroing out or gaining from the market’s losses. I believe that capital preservation will be important for surviving the coming years of a deleveraging economic cycle.

 

Taxes

All of our trading is done in our IRA accounts so as not to have a tax liability and to eliminate the bookkeeping headaches from any short term trading gains. In using the leveraged ETF’s, I make sure that I either have a stop-loss in place or a firm mental stop of, say, a few percentage points. These stops move in sync to protect the gains.

This is my plan and I'm sticking to it.

About the Authors

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance and world travel. With the wealth of information they share on their popular website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible.

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