December 2018 – Dividend

Final month of 2018. And the final monthly dividend report for this year. The Stockmarket has tanked last few months which leads too all sorts of speculation and doubt, for my strategy it’s not important. For I am still in the building up part of the process. Time in the market is far more important than timing the market.

The dividend this month is less then December 2017, because I sold Shell in the summer. So we are down 67%. Green costs money ;). This will be corrected next year because the money went into other dividend paying company’s. Overall the dividend in 2018 is up 27% compared with 2017. Which is pretty good. It’s motivating.

We will see what 2019 will bring.

The numbers:

DateStockCurrencyAmount
20-12-2018Vanguard dividend appreciation ETFEUR1,51
18-12-2018Icahn Enterprises LPEUR1,53
14-12-2018DowDupont EUR3,33
14-12-2018Coca-ColaEUR5,13
13-12-2018Microsoft EUR8,07
05-12-2018UnileverEUR3,87
TotalEUR23,44

Options – What’s are options ?

Options, a very nifty and useful financial instrument which can be traded on all sorts of exchanges. In this new series I will start from the beginning and will explain what options are and how we can use them in our portfolio’s. Ok let’s start.

An options is the right too buy or sell a product for a set period of time for a predetermined price. Most people’s only experience with an option is when they take out an option on a house. For a fixed period the buyer has the right to buy the house at the agreed upon price without the seller having the option selling the house to someone else. Most of the time this is done for the buyer figuring out finances and seeing if the house is structurally sound. These conditions enable the buyer that if one of these non binding conditions apply they don’t have too buy the house. (This is the way it’s done in the Netherlands , maybe this will differ per country. But you get the idea, I hope)

With this option comes a risk, if there is no non binding reason for the buyer getting out of the deal, they either have to buy the house or pay a 10% fine, which means 10% off the agreed upon price. So there is also an upside for the seller. He/she knows they either sell the house or get 10% in such a case.

The risk for the seller is this, in the meantime they can loose possible other buyers and when the markets are hot they might miss out on the rising prices in the period the option on their house is valid. And if the deal falls trough they can start all over again finding new buyers.

An option is comprised of a set of attributes, an end date , an underlying product (stock, house, commodities , etc) an a fixed price at which the underlying product can be bought or sold.

Trading options can be done on all sorts of (financial) markets, but most well known are stock options. Which will be the main focus of this series.

You have 2 types of options. One gives the right too buy stocks , named call options. The reverse, a right too sell stocks is called a put option. Let’s look at them with a simple example.

Call option :

An option is being noted (mostly) as, AH C20.00 21DEC2018, which is Ahold Delhaize, Call 20 Euro , 21 December 2018.

The first part is the name of the underlying stock, in this case Ahold Delhaize. Followed by the price at which the option can be exercised, 20 Euro’s in this instance. Last but not least the end date of the option. The date on which the option expires, and becomes worthless.

Also worth mentioning, 1 option will give you the rights on 100 stocks , so in this case you can buy 100 stocks Ahold at a price of 20 euro’s each, before the option expires on 21 December of 2018. A total of 2000 Euros worth of risk. Options generally end on the third Friday of each month.

Put Option :

Essentially the same principle, just another right, one too sell instead of buying. It’s presented in the same way, AH P20.00 21DEC2018, Ahold Delhaize Put, 20 Euro, 21 December 2018. This is again a right for 100 stocks, Ahold in this case again, a sell right for 20 Euro each.

Well so far we have learnt a Call gives a buy right, a put a sell right. But when there are buyers there must be sellers. Together they make the market. Buying an option will cost you a premium. As expressed in the option price you see when looking up an option on the exchange.

You can look at the option price as an insurance premium, you will pay every month on your car insurance. The insurance company is the seller of the option (insuring your car against the risk of damaging it). And you are the buyer. You cover unexpected damages and events and in return you pay a monthly fee (the premium). The insurance company now takes the risk that if you have an accident they will have to pay for the damages. You are insured against these risks for a certain amount of time (mostly a year).

The premium or price of an option is changing a lot faster then the premium of your car insurance. But the same principle applies. A seller makes a risk analysis with selling the option and gives a price too the buyer. The option buyer insures the fact he can buy or sell the underlying stocks at the price of 20 Euros, until the expiration date. The seller has too buy or sell them too the buyer at this price.

The option price is determined by the price of the underlying stock, the distance too the strike price of the option (the 20 Euro’s) and the time left in the option, i.e the number of days , hours minutes until the option becomes worthless. Other factors are interest rates, dividend payments and overall sentiment in the market.

Where do people use these options , or insurances for ? Well, that will be the next item in the series. For now just let the characteristics of options sink in.

Portfolio news – Winter 2018

Time for another portfolio news. Since the last additions I have been going out of the fossil energy industry and reinvested the funds into technology and the ETF’s. I had still had Shell, sold ONEOK before that and now it was time to remove Shell from the portfolio. It’s a nice dividend income and for all their commercials and PR towards clean energy I haven’t really seen anything apart from sponsorships. No real moves as of yet. In name an Energy company, in practice still a old style oil giant. I realize I am still an investor by the way of the ETF, so I am not completely clean at the moment. But this is the first step.

Also out is General Electric, one of my longest holdings in the portfolio, and one I neglected acting on earlier which resulted in a loss, another testament towards simply buying an ETF and holding that instead of following separate companies. But I am still having fun doing the research, so for now I will keep adding some handpicked stocks to my portfolio.

As for technology , more ASML, Apple and Microsoft have been bought. Next on the list is Philips. Getting larger in healthcare which will remain a growing market, it’s been lagging a bit lately and now starts making up a bit. So I will start out with writing put options and seeing how things develop.

The ETF’s have seen the biggest growth in my portfolio, simply because it’s easy and cheap. Which comes a long way in having a nice return in the future. Low costs and simplicity is key. Its also remarkably stable. My handpicked portfolio goes up and down a lot more, which makes sense because it only contains a few positions versus hundreds combined in an ETF.

So my testcase is more and more in favor of the ETF’s , which I will be allocating more money towards in 2019.

Control your finances, but why?

Nice oneliner, isn’t it? But having control over your finances, what’s that exactly ? It’s knowing exactly whats coming in and going out each month, for starters. It leaves you with an exact number you have left each month. And you can go figure out what you can or must do with it.

In the Netherlands, where I live the national budget institute, which advises people on responsible finances has a lot of different data on budgets, savings etc. It says only 27% of all Dutch people keep a monthly cash flow report. And 25% has savings less then 2200 euros. Which is roughly 1,5 months of expenses if you don’t a lot of those. A lot more numbers are available but you get the idea.

It’s simply a fact most people don’t know their financial status from one month to the next. Which doesn’t have to be a problem if you simply spent less than you make. Which leaves a buffer automatically. Which in most cases end up in savings accounts.

But it pays dividends knowing how the numbers look and taking it as a starting point in thinking about your financial future. Best case scenario is thinking about how your surplus can make you money, worst case if you come up short each month how too fix that issue.

Let’s start easy, by making a simple monthly balance in a spreadsheet or on a piece of paper, doesn’t matter. You first write down your income, for most your salary. Then deduct your mortgage or rent, your utilities bill, all your taxes etc. Then if applicable monthly tax breaks and or subsidies. (which vary per country.)

Which leaves an amount of money which you can spend, but we’re not there yet. You need too eat. If you haven’t got an exact number on your groceries make an estimate. Deduct that and you have your free spending money for that month. Well most sensible thing you can do is make a fixed reserve and deposit in a savings account. Anyway now you know more or less what comes in and goes out each month. Easy enough right ? Your monthly budget is alive !

With what you have left , you can start doing stuff, spending it , or saving it, or reducing debt. It doesn’t matter really. You now now a figure which you can safely allocate or spend for this month. Start saving for future calamity’s is smart, replacing broken washing machines, unexpected car repairs and so on. You name it, it will happen and an nest egg will help you overcome such things.

Looking up all your monthly costs will take some time when doing it for the first time. Most don’t really changes a lot during the year and once you have 1 month mapped out, the rest will be less work. For inspirational purposes I added an example, a very basic spreadsheet as a start, click here Monthly budget . Most months after the first initial set up it will take about 5 minutes making a new one for the coming month. Maybe 10, but 5 is an amount people tend to want too spend on not so fun stuff, so just stick with 5.

But why ? Well stress which comes directly from financial issues is one of the most recurring causes of stress. A nagging feeling not knowing if you come up short or have enough money in reserve or when having have debt is a large amount of stress people experience on a daily basis. Im my experience starting out with a budget will make things a lot clearer and is a good starting point in solving financial problems one might have. Your feelings get to be facts and facts make solutions possible. You can now start improving your financial situation.