Here is a short course on the Integrated Options Portfolio. so that you can understand how different it is from the other investment strategies you have heard about before.
That may sound like a bold statement to make from a professional money manager. We agree that it is bold and invite you to fully understand why we are so excited.
We’ve put together a few lessons on the Integrated Options Portfolio (IOP), because we want both our advisors and their clients to be very comfortable with our approach to portfolio management.
Let’s begin with “Call Option Basics” for a fresh course on the risks and rewards of buying a registered “call” option.
Then, we’ll jump into “Integrated Options Portfolio 101” to give you a good idea of what an IOP is.
We will then move to “Integrated Options Portfolio 201”, which will deal with some of the variables that affect an IOP.
Finally, in “Integrated Options Portfolio 221” we will demonstrate some of the ways that an IOP impacts not only the investment portfolio, but an entire financial plan.
When you go through these sections, take them slowly, many of the concepts may be new to you and the significance of the IOP may not come instantly. Try not to get hung up on any specific “objection” you may have because it will likely be addressed in subsequent sections. Write them down and if they are not answered, please contact us.
Not all issues and situations can possibly be addressed; however, we welcome you to contact us to discuss your unique concerns or situation. Enjoy!
Call Option Basics
In order to begin to understand why we believe an Integrated Options Portfolio is superior to traditional directly held portfolios, let’s first evaluate the risks and benefits of buying a “call” option.
When we buy call options on a stock or fund, we have the right (not the obligation) to purchase the shares of that stock or fund at a fixed price (called the Strike Price) anytime on or before the date that the option expires. The value of the options is determined by market forces and is closely related to the value of the stock or fund.
It is important to know that the potential gains from owning these options are unlimited, but the potential loss is limited to the amount paid for the option.
We have $50,000 and would like to buy $50,000 worth of the “ABC” Stock Fund valued at $50/share. We could just purchase 1000 shares, or…
We can purchase call options at the $47 strike price that expire in 2 years, currently valued at $6.50/share. Buying these options on 1000 shares would cost us $6,500 today. The value of these contracts will fluctuate with the market, but at expiration, they will be worth the difference between the contract’s strike price ($47) and the current market price.
If the “ABC” Fund is valued at $75/share on expiration day, our options would be worth $28,000 (($75 market price-$47 strike price) x 1000 shares.) or a 330% return on our $6,500.
If the “ABC” Fund is valued at $35/share on expiration day, our options would be worth $0 (There is no value in using our options contract to buy at $47/share when the shares can be bought at $35/share) a 100% loss on our $6,500.
If we graph all the possible prices between $0 and $100/share for the “ABC” Fund on the day the options expire, we get a good feel for how owning our options compares with buying the stock directly. The blue line represents the profit or loss of the fund directly held and the orange line displays the profit or loss if we were to just buy an option on the same fund.
Do you see how our losses are limited to the price paid for the options, but our potential is unlimited? This is one reason why to buy call options.
Popularity of Options
You should know that the options market is huge and growing exponentially as more and more investors understand the power of options.
Now that we’ve taken care of some of the groundwork, take the next step and let us show you why we believe the Integrated Options Portfolio is superior to direct ownership investment management.
Integrated Options Portfolio 101
First, an Integrated Options Portfolio does not fundamentally change what makes up a good portfolio. What should be understood is that an Integrated Options Portfolio helps us determine “how” to own what goes in a good portfolio.
At its most basic, the term Integrated Options Portfolio, or IOP, is used by Desert Rose Capital Management to describe a portfolio where the shares of stocks and stock funds are not actually owned in the portfolio. Instead, they are replaced with the equivalent amount of registered stock options on the same, or nearly the same, stock or stock fund. Every situation will be different which is why our expertise is essential to getting the most from an IOP. Let’s look at an example IOP:
The desired portfolio is selected and each stock and stock fund is evaluated to see if an IOP structure would be an improvement (it usually is).
Registered stock options on the same number of “ABC” Fund shares are purchased at a fraction of the cost of buying “ABC” Fund shares directly. The remaining money is then used to purchase lower risk, income-producing assets. This process is then repeated for the other assets in the portfolio.
The portfolio now consists of a large amount of lower risk, income-producing assets, and a small percentage of options. Nevertheless, the portfolio has approximately the same stock or stock fund exposure as the original portfolio in Step 1.
Note that we still control the same size position in each stock fund as before through the options, yet only a fraction of the previous amount is actually exposed to the risks of those funds.
Why go through all this?
To answer that question, we will focus in on the comparison between owning shares of “ABC” Stock Fund directly versus through the Integrated Options Portfolio structure. By not owning the shares of “ABC” Fund, we will not have any shareholder rights (no dividends, voting, etc.), unless we decide to actually purchase the shares. In this case, the dividends are 1%/year. We will not have to pay the “ABC” Fund expense fees which will save us 1.25%/year, but Desert Rose will charge a 1% fee to implement and manage the IOP. We will also assume that the fixed income money ($43,500) was put into bond funds (“RST” Fund), which historically have been more conservative and stable yielding 5%/year. Assumption for simplicity:
- Bond fund price remains constant.
- The account is a ROTH IRA, so taxes are not a factor.
Okay, now let’s see what happens on the expiration day of the options if the price of the “ABC” fund doesn’t change for two years:
Day 730 $50 per Share
- Dividends were approx. $1,000 (1%/year), but “ABC” Fund expenses were $1,250 (1.25%) for a $250 loss if owned directly. (dividends and expenses based on $50,000 average account balance)
- The “ABC” options value at expiration is the difference between the Market Price of $50/share and the Strike Price of $47/share multiplied by 1000 shares for a gain of $3,000.
- With “RST” yielding 5%/year ($4,350), the Desert Rose Management Fee of 1%/year is $1,000, for a net gain of $3,350.
The IOP outperformed by $100….nothing to write home about, but hang in there and we’ll get to the good stuff. What happens if the “ABC” Fund was to go up by 50% to $75/share over the two years?
Day 730 $75 per Share
- Dividends were approx. $1,200 (1%/year), but “ABC” Fund expenses were $1,500 (1.25%) for a $300 loss if owned directly. (dividends and expenses based on $60,000 average account balance)
- The “ABC” options value at expiration is the difference between Market Price of $75/share and the Strike Price of $47/share multiplied by 1000 shares for a gain of $28,000.
- With “RST” yielding 5%/year ($4,350) and the Desert Rose Management Fee of 1%/year is $1,200 (again, based on $60,000 average account balance), for a net gain of $3,150.
The IOP performed the same over the two year period as the directly held account. Still not real excited? So let’s talk about one of the great characteristics of an IOP structure, what happens when the “ABC” Fund declines 50% by the expiration date of the options?
Day 730 $25 per Share
- Dividends were approx. $800 (1%/year), but “ABC” Fund expenses were $1,000 (1.25%) for a $200 loss if owned directly. (dividends and expenses based on $40,000 average account balance)
- The “ABC” options value at expiration is the difference between the Market Price of $25/share and the Strike Price of $47/share multiplied by 1000 shares. However, since we are not obligated to buy at $47/share, we will let the options expire worthless for a loss of $6,500.
- With “RST” yielding 5% ($4,350) and the Desert Rose Management Fee of 1%/year is $800 (again, based on $40,000 average account balance), for a net gain of $3,550.
In this scenario, the IOP outperformed by $21,450 and we still have capital to purchase new option contracts to profit when the market recovers.
The IOP Wins Out
We’ve already looked at what would happen for three different price scenarios. This is the chart comparing the IOP structure versus a direct ownership for all the possible “ABC” Fund prices at the expiration of the options for everything from a 100% loss to a 100% gain in “ABC”.
Under our present assumptions, the IOP has the equivalent upside potential with significantly less downside risk than if we were to simply buy the “ABC” Fund directly.
Integrated Options Portfolio 201
Comments on Assumptions
Similar to most investments, there are a host of factors that are situational and must be accounted for on a case by case basis. Taxes, interest rates, currency concerns, fees, dividends, credit risk, opportunity risk, inflation, deflation, time horizons, transaction costs, liquidity issues, politics, and any number of probable and improbable concerns can affect the performance of a portfolio.
Up until now, we’ve chosen a specific scenario that has assumed three large variables; Interest and Dividends, Stable Bond Fund Prices and Taxes. Let’s deal with these three now.
Interest and Dividends
While neither of these variables are predictable, we have a pretty good idea of what we should expect over the duration of the options. Dividends in a well-diversified portfolio normally don’t vary much over a 2-3 year period.
A sudden, drastic move in interest rates could affect the payout of a short term bond fund, but with today’s low interest rate environment, major moves would most likely be higher (more favorable to an IOP), not lower. Defaults in a bond fund can be a concern. If the bond fund is buying good credit quality bonds with shorter term durations, the likelihood of significant defaults in the long run are not very high.
Part of the beauty of the IOP is that the income producing assets normally return a surplus after paying for the costs of the options. Additionally, since we have such a large fixed income allocation, we are well positioned for deflation, yet we are fully positioned for all of the inflation neutralizing benefits of a strong equity portfolio due to the long term call options. We will discuss this more in the next section.
Hopefully, by now, you are beginning to see why an Integrated Options Portfolio truly is an evolutionary leap in investment management.
Stable Bond Fund Prices
The value of a bond fund is based on many factors and the current price at any given time will fluctuate. Although we seek to find growth in the share prices as well as income, our primary purpose is steady income for both short and long term. Prices will fluctuate over time, but as long as the price is favorable when we sell, it really is not a big concern.
Think of it like rental property, if we bought the rental house for income during retirement, why do we care what the house appraises for while we still own it? We just want steady rent payments and low costs. If we can sell the house for more when it’s time to sell, great, but while we need income, we just want income.
One reason why we prefer shorter term bonds right now is because we are in such a low interest rate environment. The difference in yield between short and long term bonds is minimal and if interest rates rise, the shorter term bonds should not be as adversely affected. In fact, as bonds mature, those bonds can be reinvested at higher rates, which will improve the yield even more (our primary concern). This means that the fund price may decline temporarily, but will adjust as the fund’s portfolio adjusts to the new interest rates. Again, true customization to the client’s time horizon allows us to adjust for short term fluctuations in bond fund prices.
This is another area where an IOP can be adjusted to each client’s situation. With input from the advisor, the client, and a CPA, we are able to adjust how it is managed (when and how gains are taken), how it is structured (municipal bonds, annuities, taxable bond funds, etc.) and where the IOP is held (taxable account, IRA, Roth IRA, trusts, etc.). Additionally, if you have multiple accounts with different tax treatments, we can coordinate each account to hold the specific securities that will be most tax advantageous.
Many advisors and individuals are concerned about volatility in the market place, rightly so. An IOP works great in volatile market conditions, because of the limited loss nature of an option contract and the stabilizing effect of the large fixed income portion. It is likely for volatility to continue for the foreseeable future which makes the IOP more important now than ever.
The fact that our call option contracts only last for 2-3 years (short-term) is great for long-term performance. At the end of each option contract, we rebalance the portfolio and repeat the process. If the market is flat we collect income, if it rises we participate, if it declines we are positioned for significant growth during the recovery
As a final lesson for this section, look at the hypothetical performance charts for three major index funds that show how having an IOP structure changes investment performance versus not having the IOP structure. Similar results take place with most investable asset classes.
Remember it is not what you own it is how you own it.
Integrated Options Portfolio 221
In the last sections, you learned the basic concepts, risks and benefits associated with an IOP. This section should whet your appetite in a few key areas of investing that are improved through the use of an IOP. Let’s begin with inflation and deflation.
These two animals are the silent destroyers of many financial plans. They have been mostly tame over the last 150+ years in this country, but both are now knocking at our doors. In fact, deflation has already come in through the door and poses the most urgent threat. It devastated the world during the Great Depression and is currently causing much grief and turmoil.
On the other hand, there is a very real threat that the large scale actions by the Federal Reserve and lawmakers in the U.S. may bring about serious inflation on a scale that has not been experienced in this country since its early days.
We should clarify that there are two types of inflation that we see as a threat.
First, we are talking about the “rate of fall” (of the value of the dollar) when we are talking about a steady decrease in the dollar’s purchasing value. Anything that the U.S. has seen in the last 100 years, we would place in this category.
Second, we are talking about very rapid adjustments to the purchasing power of the dollar or an “already fallen” dollar. This happens very rapidly and usually without much warning. It comes about when governments increase the money supply rapidly and the markets finally catch on. While someone in shorter term CD’s or TIPS could adjust partially to a high “rate of fall”, by earning interest at the new higher rates, rapid adjustments diminish purchasing power before there is any time to earn interest.
At Desert Rose, we are not doom and gloom people. We are not saying that any of the above scenarios will take place and we hope that they don’t. We don’t pretend to be able to know just what will happen, but we can prepare as best we know how, while continuing to strive to make more money with less risk in the meantime. We kill two or three birds with one stone, so to speak. We chuckle when we hear the solutions that some of the news pundits put forth to solve these two threats of inflation and deflation, not because they’re stupid, but because what we do here at Desert Rose is so much better.
Let’s look at some current “solutions”
What would most people consider to be a good asset class to take on normal rates of inflation? That’s right, real property and assets (commodities like gold, stocks, real estate, etc.) that would adjust over time as well as bond type investments that could also keep pace.
Now, how do most deal with serious inflation, the rapid adjustments? The only thing is real property and assets (commodities like gold, stocks, real estate, etc.) or owning assets in another currency (assuming the other currency is not falling quickly as well). These assets adjust to the current conditions once they are known. Think about it, if you own shares of a bread business and inflation suddenly causes the price of bread to shoot up to $10 a loaf, the bread company could make the adjustment immediately and then be able to pay down previous debt using inflated dollars. The intermittent turmoil could cause some havoc, but it would still be a pretty good hedge.
What about deflation, what do most people recommend? They recommend the exact opposite. Cash, income paying investments like bonds, etc. Whatever asset you buy now will just be worth less tomorrow.
So unless you have a crystal ball to know whether it will be inflation or deflation, you can flip a coin and position the portfolio accordingly, or you can do what many pundits say and split the difference. This means that you will be right and wrong, with only half the money being positioned correctly in either case. That’s a poor solution in our opinion.
Two birds with one stone
We can be much better positioned for both inflation and deflation when we use an Integrated Options Portfolio. We first choose an asset that would position the client for inflation, it could be stock funds (foreign and domestic), REIT ETF’s, Gold ETF’s, etc. Rather than buying the shares directly, we buy an option on the same shares at a fraction of the cost. We then take the difference and purchase a great tool for deflation, fixed income. Let’s use the example from the ”IOP 101? section. As illustrated, this structure performs better regardless of the direction of the shares of the main asset. Since we have $50,000 and want to purchase options on $50,000 worth of the underlying asset’s shares, we will have a long position for 100% of our initial amount. This means that the $50k is fully positioned for inflation.
At the same time, only $6,500 is needed for the options, which means that $43,500 is diversified away from “ABC” Fund in an asset (bonds) that is great for deflation.
Two birds, one stone, and it’s positioned beautifully for normal inflationary environments as well.
When you are planning for the income needs of a client during retirement, the need for that income to last throughout their client’s life is paramount. One of retiree’s biggest fears is that they will run out of money during retirement. While living longer is a great thing, it also poses a challenge for advisors.
As part of their plan, many planners will place their clients into a 40/60 stock/bond portfolio to be able to weather the major financial storms. They do this because of the reduced volatility that normally accompanies bonds. This leaves smaller amounts to place into stocks, which help provide potential growth, a hedge against inflation and diversification. Under this model, many planners advise their clients not to withdraw more than 3-4% of the portfolio each year. Although some may go as high as 5%, advisors are extra cautious to ensure that their clients do not end up running out of money.
How does Desert Rose help?
First of all, because of the characteristics of the IOP, we believe that your clients will have much more to begin with when they go into retirement because our models have the potential to improve the returns of what is owned in the portfolio, even as risk is simultaneously reduced.
Second, because of the decreased likelihood of severe drops in a client’s account value when they are positioned in an IOP, clients can more easily recover from downturns in the market. This allows them to maintain larger “virtual” stock positions to be able to profit more in bull markets. We say, ”virtual”, because we own options on more shares of stock, which have the potential to profit in much the same way as owning the same number of shares directly when the stock fund’s price increases. We don’t actually own the shares and only pay a small fraction of what it would cost to own those shares, so in reality, we have a very small exposure to the stock price in bear markets. This gives us more potential growth which means more income, yet similar or even lower risk.
The following pie charts compare the proportions of assets. The first chart shows an asset allocation that many direct ownership type asset managers might recommend for someone nearing retirement. The second is the “Virtual IOP”, which demonstrates the equivalent position that would have to be taken in a direct ownership method in order to profit similar to an IOP in flat or bull markets. The last chart gives us the actual makeup of the portfolio, which tells us how the IOP will perform in bear markets. Notice that most of the portfolio is in what most professionals would consider to be more stable assets.
Third, when a limited upside of 20-30% is not an issue, we can modify the IOP to produce more income and lower risk even further. It actually works better than the standard IOP in sideways or down markets, but the tradeoff is limited upside. Call for more information on this topic.
More AUM (Assets Under Management)
Think about what the last section means to you and what it means in the lives of your clients. A better lifestyle, less stress about the economy and their futures (fewer phone calls to you wondering if they should change things again) and more referrals for your business. Think about how this affects your client presentations when you are up against another advisor. When you can get 50% more income than the other guy, who are they going to pick to manage their accounts?
Along these same lines, the volatility in the market has created a lot of fence sitters that know that being in the market is a good place to be for a hedge against inflation, but they are too concerned about current conditions to act on that knowledge. These people’s purchasing power could diminish greatly from inflation if their money is left in bank CD’s paying them next to nothing. How many people lost out in 2009 and 2010 because they were parked in a 1.5% CD?
Many of these people could do well with the more conservative versions of an IOP. The possibilities are many and vary based on each situation. Contact us for a specific case.
The Do-It-Yourself Investors
This is another class of potential clients. They have read books and articles on investing and believe they are able to put together a portfolio just as well as anyone. They don’t see why they should pay an advisor anything, since they can get the same funds as anyone else. While we know a good advisor’s counsel is more valuable than his fee, the do-it-yourself guys don’t understand that yet, or haven’t found the right advisor.
An IOP helps them to see real value. When we can help them make more after paying us than they would on their own, with less risk and less hassle, you’ll have a new client. When they see the other services that you bring to the table, you’ll have a loyal client. What we do here at Desert Rose Capital Management is exciting. It’s not talked about in the news or written in a book in the investment section of Barnes and Noble. It’s not a gimmick or just the results of a lucky streak by a stock picker. It is professional money management. It requires extensive knowledge and experience in the markets, specialized computer modeling, a deep understanding of financial planning, taxes and more. The IOP is not a do-it-yourself technique and they recognize that, enjoy being involved and love to talk to their friends and coworkers about what we have.
Changing Market Conditions
A dilemma that faces most money managers is how to react when the investments that they own have made large gains or when they have dropped significantly. There are many theories that we won’t get into here, but keep in mind that these are emotionally charged decisions. If he sells after a large gain and the stock continues to rise, he’ll kick himself for not staying in it. If he doesn’t sell and it goes down, he’ll kick himself, because he just “knew” that it would go down.
The same is true after a large loss. If he doesn’t buy more or hang onto the shares, he will kick himself when it goes back up again. If he does buy more, Murphy’s Law of investing says that it will drop further.
The fact is that no one knows for sure what will happen next, especially short term. While we don’t try to time the market, we can adjust the IOP to set limits on the amount of money exposed to that same stock as the stock makes large moves.
At Desert Rose, we don’t just allocate portfolios based on predictions or even just good allocation models. We create customized portfolios that utilize the power of an Integrated Options Portfolio. These portfolios are designed to create more money and income with less risk.
The peace of mind that comes to both the clients and their advisors is significant and refreshing. In a world filled with financial advisors around every corner that offer virtually the same services, an IOP really sets you a few notches above the competition.
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After all is said and done, good cash flow is what determines the lifestyle your clients will experience in retirement. When you are planning for the income needs of a client during retirement, the need for that income to last throughout their client’s life is paramount. One of retiree’s biggest fears is that they will run out of money during retirement. While living longer is a great thing, it also poses a challenge for advisors.
As part of their plan, many planners will place their clients into a 40/60 stock/bond portfolio to be able to weather the major financial storms. They do this because of the reduced volatility that normally accompanies bonds and the ability to distribute income for multiple years without havening to sell equities at a potential loss. The large bond allocation leaves less capital available to be place into stocks for purchasing power protection. Under this model, many planners advise their clients not to withdraw more than 3-5% of the portfolio each year to ensure that their clients do not end up running out of money.
First of all, because of the Integrated Options Portfolio (IOP) characteristics, we believe that your clients will have more money to begin with when they go into retirement. This is accomplished by owning their portfolios indirectly through the use of options and a counterbalancing, fixed income portfolio. Some of the potential benefits of this combination include lower risk, increased returns and higher income. This system of ownership is described more thoroughly in the IOP section of this website, but as illustrated by the graphs below; our models can improve the returns of what is owned in the portfolio, even as risk is simultaneously reduced.
Second, because of the decreased likelihood of severe drops in a client’s account value when they are positioned in an IOP, clients can more easily recover from downturns in the market. This allows them to maintain larger “virtual” stock positions to be able to profit from in bull markets. We say ”virtual” because we own options on shares of stock, which have the potential to profit in much the same way as owning the same number of shares directly when the stock fund’s price increases. We don’t actually own the shares and only pay a small fraction of what it would cost to own those shares directly. So in reality, we have a reduced exposure to the stock price in bear markets. This gives us more potential growth which means more income, yet similar or even lower risk.
The following pie charts compare the proportions of assets. The first chart shows an asset allocation that many direct ownership type asset managers might recommend for someone nearing retirement. The second is the “Virtual IOP”, which demonstrates the equivalent position that would have to be taken in a direct ownership method in order to profit similar to an IOP in flat or bull markets. The last chart gives us the actual makeup of the portfolio, which tells us how the IOP will perform in bear markets. Notice that most of the portfolio is in what most professionals would consider to be more conservative and stable assets.
Third, when a limited upside return is acceptable to the investor, we can modify the IOP to produce more income and lower risk even further. It actually works better than the standard IOP in sideways or down markets, but the tradeoff is the limited upside potential. Call if you’d like more information on this topic.
We invite you to explore the many benefits of Desert Rose Capital Management, Inc. Let us prove to you why we believe that there is no better way to invest in the market.
An Integrated Options Portfolio is a portfolio where the shares of stocks and stock funds are replaced with registered stock options on the same shares, but at a fraction of the cost.
The money that is left over is used to purchase conservative, fairly liquid, income producing assets (high quality, short term bonds, CD’s, dividend stocks, etc.).
Among other benefits, the results can be more money, less risk, increased diversity, more income and more flexibility than holding the actual shares of stock.
Added interest, improved tax structure, lower fees and limited losses can all contribute to the performance of an IOP. Results will vary, but the risks and potential benefits are known and evaluated ahead of time.
Normally, the type and amount of the investment does not need to change, but a similar fund or stock from another company may fit better depending on many factors. Call us if you have a specific scenario. Remember, it’s not necessarily ‘what’ you own, it’s ‘how’ you own it.
One of the main purposes of structuring investments with an IOP is to significantly lower your current risk while maintaining, and in most cases, enhancing performance. We use options in very controlled, conservative ways that limit losses and reduce overall risk.
Options can be used in a wide variety of ways. Some people use options in an aggressive and risky manner. On the other hand, the IOP portfolio uses options in very controlled, conservative ways that limit losses and reduce overall risk. In fact, the IOP uses options in a manner that has far less downside than owning shares directly. One of the primary benefits of using an IOP is to reduce risk.
We are confident in the value we bring to your portfolio and are passionate about improving its performance. If you do not feel like you are better off by having your investments managed by Desert Rose Capital Management, let us know and we will waive the fees in your account for the previous quarter.
Because of this satisfaction guarantee, your fees may range from $0 to 2% or somewhere in between depending on the size, complexity and customization of your portfolio.
No longer than your current investment horizon. Long time horizons are normally a prerequisite when investing in stocks, because of their volatile nature. Short time horizons do not allow any serious corrections enough time to recover. The IOP can be adjusted for shorter time horizons to really reduce the possibility of a loss, which makes shorter time horizons more feasible. Every situation is evaluated independently, but this can open up more opportunities for shorter term pools of money to have better opportunities for growth. This is very beneficial, especially in today’s low interest rate environment.
With an IOP, you will normally have more flexibility and more availability of your capital. We are able to use tax advantaged fixed assets (like municipal bonds) and the currently low, long term capital gains rates on the options portion of the IOP to hold taxes to a minimum. This can allow the portfolio to perform in a taxable account similar to an equivalent direct-ownership portfolio held in a retirement account. When there are no real advantages to using retirement accounts, we don’t. A major advantage, when we’re able to keep the investments in a taxable account, is the ability to react to ever changing market conditions and life’s opportunities and challenges. Each situation is different. Consultation with the your CPA is recommended.
Normally, the type and amount of the investment does not need to change, but a similar fund or stock from another company may fit better depending on many factors. Call us if you have a specific scenario. Remember, it’s not necessarily ‘what’ you own, it’s ‘how’ you own it.
Because an IOP typically earns more money, it can greatly improve the amount of income available to be spent during retirement. More after tax amounts mean you won’t have to withdraw as much for your needs and Uncle Sam’s.
Also, because of the lowered risk, you can withdraw a higher percentage of you portfolio without as much concern for running out of money. Most financial planners keep portfolio withdrawals between 3-5% of the portfolio. This low level helps ride out major corrections like we’ve seen recently. With an IOP, corrections are not nearly as severe. Our models show withdrawals from an IOP at 5-6% to be a reasonable equivalent to a 3-5% withdrawal without an IOP. These concepts are critical for determining the type of lifestyle you will experience and the freedoms that you will enjoy during retirement.
An IOP may help lower your tax bill. When taxes are an issue, we work with your CPA and make adjustments to the IOP structure accordingly. The use of municipal bonds or other tax friendly vehicles and long term capital gains on options held for more than a year provide an effective after tax return that is often similar to owning the shares outright in a Roth IRA.
Although an IOP doesn’t have the tax free benefits of a Roth IRA—an IOP can be even better than a Roth IRA since an IOP does not have all the limitations and liquidity issues of a Roth IRA. For higher income and/or higher net worth individuals, an IOP must be considered.
Every situation is unique. In some cases it is a terrible idea and in others it makes perfect sense. There are many choices available for the conservative portion of an IOP. Life insurance policies built specifically for an IOP can provide good stable growth similar to many bond funds, especially in today’s low interest rate environment. The total return with life insurance as a part of the IOP may also be greater if the other characteristics of a life insurance policy would enhance the overall financial plan. Considerations must be taken for tax planning, income protection in the case of a total disability, liability protection, income enhancement during retirement and, of course, a death benefit. One of the strengths of Desert Rose is that we will optimize the structure to you.
No. The creation of an IOP takes about the same time as designing a typical financial plan. Desert Rose Capital Management, Inc. does the heavy lifting. We analyze, develop and maintain the desired portfolios. Since an IOP reduces the overall risk, it can also allow you to live your life with less anxiety than you would with a traditional, stock ownership type portfolio.
Desert Rose Capital Management manages the accounts. Portfolios are customized according to your individual circumstances, risk tolerances, market outlook, etc.
In bull markets, the performance of an IOP is generally enhanced when compared to traditional investing. In bear markets, especially in extremely bear markets, your IOP account should significantly outperform a traditional, stock ownership type portfolio. With an IOP, bear markets can actually be very beneficial, especially for long term investors.
An IOP allows you to position up to an equivalent of 100% of your portfolio’s value in assets like stocks, REIT’s, commodity funds, gold ETF’s, etc., while maintaining a very significant position in fixed income type assets. This provides both a hedge against the very real threat of inflation and/or a devalued dollar and a very strong position for fighting deflation at the same time. This is another way that Desert Rose takes financial planning to a whole new level.
Among the other benefits already mentioned, the peace of mind in knowing that your entire future isn’t constantly at risk to the whims of a fickle economy allows you to make better decisions. Having an IOP for your investments allows you to take advantage of volatile market swings, to protect your gains and/or lower the cost per share of your investments. Owning the same investments without an IOP does not allow you to do this.
Absolutely. All of the financial tools used in an IOP are highly regulated, transparent and well understood. In fact, over 300,000,000 option contracts representing over 30,000,000,000 shares are traded each month.
The “Integrated Options Portfolio” name originated with Desert Rose Capital Management. It is a vastly improved variation of a management technique that has been used in a similar form by institutions for years (when we say similar, it’s about like the similarities between pancake batter and flour paste…the ingredients are similar, but the outcome is very different.) The previous institutional methods were never very practical for the individual until just a few years ago due to high costs, poor liquidity, the lack of availability of certain financial instruments (ETF’s and LEAP’s) and the lack of the right technology to manage such a structure. Today, those concerns are no longer an issue, but these processes are virtually unknown among even the best money managers. Most advisors are simply not familiar with the advantages of this method for investing.
Good question. We believe that most investors should. Please spread the word.
We’ll be happy to give you a side-by-side comparison of what your current investments could do if they were managed by Desert Rose Capital Management, Inc.