How can you continue to generate enough income for your needs as your capital diminishes with increasing speed despite belt-tightening in retirement. Financial advice may no longer be affordable.
Capital is critical to wealth-building and saving enough for retirement. It is also critical to income generation in retirement.
My challenge has been to rebuild our portfolio assets after the GFC whilst still paying monthly distributions.
There is little that is new or innovative in this post. My intent is to explain how I am trying to make the best possible use of the capital I have, to meet my goals, using technical tools and established strategies. The reader will have to judge whether there is merit in what I am attempting.
What is my strategy in theory to meet this?
The short answer is to contain costs, limit losses with stop/loss settings, and to maximize returns by letting profits run.
A longer explanation makes the following points:
Many focus on picking a winner to the exclusion of other considerations of equal importance. My attempt is to try to find a fit between stock and a workable execution strategy.
- The most profitable strategies harness uni-directional impulsive moves in which correctional reversals are delayed. Such moves are usually the result of break-out from a trading range.
- The next most profitable situations are based on trend investing in which there is a sequence of higher highs, and higher lows.
- Even the sideways movement of trading ranges may also be exploited, capturing movement between support and resistance, or oversold and over bought situations.
- Counter-trend trading such as buying in a falling market, is fraught with risk.
- Choose markets with which you are familiar and comfortable
- Concentrate on long-only equity trading in predominantly bull markets, to harvest your share of the profits of industry.
- Avoid adversarial trading in which it is hard to beat the “house”.
- Limit your gearing to a margin loan secured on up to 25% of the value of your portfolio in the early and mid-sections of bull-markets.
Value capital gains more highly than dividend income even if they carry imputation credits, and you have to pay capital gains at half your marginal tax rate after twelve months on any capital gains.
- In some situations there may be merit in selling into the strength of demand from so-called dividend stripping buyers.
- Selling the highs and buying the dips in an uptrend may yield as much or more in savings than a dividend.
- Use trailing stops in short-term trading an uptrend, to avoid forfeiting too much capital bearing in mind that some stocks you should only sell when long-term moving averages (60 and 120 period) are hit.
- Take profits after significant spiking of the share-price.
Use Momentum signals for longer-term trend trading
This can keep you in longer-term trades in the face of concerning pull-backs.
I really like using the multiple moving averages (MMA) of Daryl Guppy. Diverging MMA lines are a visually reassuring sign of an emerging and accelerating trend to ride. Conversely, converging and crossing over of MMA lines warns of trend change. For short-term trading be guided by crossing of the short-averages; for medium-long term trading, use the longer averages.
Consider exiting stocks that transition into sustained trading ranges likely to yield little capital gain.
Make a note of potentially profitable stocks into which you can switch when you need to.
Similarly keep a record of stocks in which you are disillusioned or you feel are too risky to touch.
If you are fortunate to have enough capital, and/or are not wishing to watch your investments too closely because you are still working, please understand my position. Remember too that many things are alright in theory, but a far different matter in execution.
An example of the use of MMA charts for entry and exit investment signals.
Stock is Aveo, Code AOG.
What is momentum?
Momentum is perhaps the simplest and easiest oscillator to understand and use; it isthe measurement of the speed orvelocity of price changes. In “Technical Analysis of the Financial Markets”, John J. Murphy explains: “Market momentumis measured by continually taking price differences for a fixed time interval. Toconstruct a 10-day momentum line, simply subtract the closing price 10 days ago from the last closing price. This positive or negative value is then plotted around a zero line. The formula for momentum is:
M = V – Vx
Where V is the latest price, Vx is the closing price x number of days ago.” What it Measures Momentum measures the rate of the rise or fall in stock prices. From the standpoint of trending, momentum is a very useful indicator of strength or weakness in the issue’s price. History has shown us that momentum is far more useful during rising markets than during falling markets; the fact that markets rise more often than they fall is the reason for this. In other words, bull markets tend to last longer than bear markets. (For more, seeMomentum Trading with Discipline.) Technicians use a 10-day time frame when measuring momentum. You will see the zero line in the chart below. If the most recent closing price of the stock is more than the closing price 10 trading days ago, the positive number (from the equation) is plotted above the zero line. Conversely, if the latest closing price is lower than the closing price 10 days ago, the negative measurement is plotted below the zero line.