As promised here the “crash recovery strategy”. It is basically a market timing and I really don’t like market timing. The point is to add risk when everybody else is taking out risk: in a bear market.
Now I am always invested 100%. The only way I can add is with a margin loan. At Interactive Brokers this is very easy and convenient and quiet cheap compared to other brokers.
One can just leave out the crash-recovery part and be fine.
I did use it the last 3 bear markets and it worked 2 times perfectly (good timing) and one time I had to suffer a lot until it worked out again (bad timing, entered too early). But the payout then was even higher. As the old saying goes: “The stock market is pain and gain, first the pain then the gain”. The crash recovery plan may be active for many years and you may suffer a lot during this time.
Here are the rules: Trigger is the S&P500 closing under 80% of its last high. I measure the lowest point in percent. That defines the leverage in the following way: for each 1% I take 1% of margin credit. If the lowest point is 70% I go to 130% margin, 30% on credit. The maximum is 150% when the S&P500 loses half of it’s value or more.
I do this when I “feel” (of course there are rules for that too) the market turns up again. There are tons of measurements one could use for that. First I check the 50 days average price. Once at least 250 of the 500 companies in the S&P500, the S&P500 itself and the Nasdaq100 and the Dow are all over the 50 days average the first requirement is fulfilled. I don’t check the Russell2000 for that, maybe that would have been a good idea the last time.
The second requirement is based on expected volatility. I check the VIX Future for contango. Once at least 3 months of the VIX Future are in contango, the second requirement is fulfilled. I buy on margin credit.
Then a three phase plan starts. The first phase is the time until either a new high in the S&P500 is reached or the credit is completely paid off by the dividends. Until then dividends are not invested and the “market dividend” concept is paused.
If the S&P500 reaches a new high before the debt is paid back, the barrier for the market dividend is set to 133% instead of 150% (5.33% of portfolio value instead of 6%) to pay back the credit faster.
While the credit is open I have a stress tolerance test active: whenever the credit reaches 300% I start selling until I am under 300% again. This is the emergency exit, didn’t happen until now, but you never know.
One may need "portfolio margin to execute this plan and have enough reserve margin. Portfolio margin at Interactive Broker gives you up to 800% margin, which is insane. As I start selling at 300% this is more than enough.
Once the credit is paid back the crash recovery phase is over.
OK guys, now you know all the rules of my dividend investment strategy, which is my pension plan and my only source of income.