Ask Doc Timing is critical... according to a lot of investors.
These investors obsess about buying a stock or other investment at the perfect time. They search for any reason a given asset will surge in the next few months (or, worse, days).
And sometimes, they get lucky... buying in right before that asset takes off. However, many folks mistake their luck in the market for genius.
Think about one of the greatest investors of all time – Warren Buffett. He didn't get rich quick from getting the timing on a stock – or larger move in the markets – right. Buffett has grown 99% of his billions since he turned 50 (he's 93 today).
Yes, Buffett is great at picking investments. But he's even better at keeping his cash in the markets even when things seem bad. Buffett isn't worried much about what the markets or his investments are doing on a day-to-day basis.
Timing is important. But if you have the patience to let your gains come slowly (and allow dividends to provide some of your returns), you don't have to count on miraculous timing to see your investments take off.
Instead of relying on companies that you think are about to rocket higher due to just the right conditions, look for companies that will do just fine no matter what happens in the economy or the markets. Look for ones that have solid underlying businesses... and that pay you dividends while you hang around.
This strategy won't lead to exciting, quick triple-digit returns... but it sets you up to get lucky when things go your way.
On the other hand, if you're just sitting on the sidelines, not knowing where to put your money, you will miss out on the potential to make gains. And, as we've written recently, certain events are more likely to lead to great opportunities.
According to Wall Street legend Marc Chaikin, there's trouble simmering in the markets, but it's not time to cash out. If you do, you'll miss what Marc is calling "the greatest opportunity in 2024."
Marc gives all the details about where he sees the markets going from here and what you should be doing with your cash right here.
Now, let's dig into the Q&A... As always, keep sending your comments, questions, and topic suggestions to [email protected]. My team and I really do read every e-mail.
Q: Please explain the term "annualize your premium" on call options. Is it the same as APY in bank CDs? – K.N.
A: This isn't exactly an apples-to-apples comparison, so let's run through how you'd calculate the returns for a savings account and a covered call...
APY stands for annual percentage yield. This is the number you'll often see for bank accounts, like checking, savings, and certificates of deposit ("CDs"). It's the percent you'll earn over the course of the year on the account's original balance plus any compounding interest. The compounding is the important part of the equation.
Let's say you invest $10,000 in an account that's paying 3% annual interest. So at the end of the year, you'd expect $300 in interest for a total account balance of $10,300. But your balance doesn't just stay at $10,000. After the first month, you'd have earned $25, which means now you're earning that 3% on $10,025. The next month, you'll have around $10,050.63. Each month, the interest you earn ticks up a bit as you compound. The APY takes that compounding into account.
At the end of the year, your account would have $10,304.16 in it. While that's only a few dollars more, if you do this every year (with even larger amounts of money), this difference can be huge. But the APY represents the real amount.
Now, let's take a look at how you'd calculate the annualized return for a covered call...
Let's say you're selling a $100 call on Widget Company ABC. The stock also trades for $100 a share. The call expires in two months, and you get a $2 premium for selling it. That's a 2% return in two months. If you sell that same call every two months (six times a year), that means you'd make 12% for the year. This is the annualized return (2% times 6). And if the company pays dividends, you'd earn even more.
You can see that while the initial return for that first call you sold is only 2%, if you repeat the trade over and over again, you earn much more.
We highlight annualized gains in our option-selling service, Retirement Trader, to account for how quickly our trades work out. We'd rather make 2% in two months than 3% in six months (which would be 6% annualized – 3% gains just twice a year).
Now, an APY on your cash has less risk than a targeted annualized return on a stock trade. But in both cases, you're putting money to work –earning either interest or a return on your investment.
What We're Reading...
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
May 3, 2024