Ask HN: What's the best way to get 5% on a million dollars?

Here is an unusual one. I have followed this similar strategy for the past 4 years on a more aggressive plan, and have returned 36%, 28%, 33%, and 6% for the past four years. The strategy heavily shorts the market, and goes partially long in a way that 99% of the time generates reliable, steady returns, and in the 1% extreme cases offers adjustment techniques to handle what the market is giving you. The aggressive nature of my approach causes the high volatility in the returns, but a much safer approach can be taken which would have nearly a 99.9% assurance of the 5%.

Sell calls and puts on the SPX index on a weekly basis. You need to generate $1K of income each week. On an account that uses Portfolio Margin at a broker like IB, $1M would allow you to open nearly 100 contracts on both the call and put side.

To appropriately manage risk, at the SPX trading at $1840, you could open up 50 calls at $1935 with 1 week to expiration for $.05. This will generate $250 of income as long as the stock market doesn't climb >6% in a single week. This has happened in the past, but only after the market has crashed the day before. 3% climb in a single week on a broad based index would be a once in a generation blue bird event, so the risk on this money is incredibly low. And even if the market did climb up steeply suddenly, there are many options adjustment techniques where you give yourself more time, generate more income, and create additional buffer to stay away from the market.

By selling 50 calls for $.05, you still need to generate $750. You do this by selling puts on the offsetting side. Markets have a tendency to crash downward, so you want to sell far fewer contracts and buy some insurance for the rare case of a market crater situation. You could sell 15 puts at $1730, again 6% below where the market is currently. A 6% drop in a single week is a rather rare event. And to hedge against a flash crash event, you buy $.10 puts at $1515. In the rare event that the market crashed or the market did drop >5% in a single week, then the same sort of adjustment techniques available in the call scenario exist here. There would be a side benefit of while you have to adjust the trades to wait for the profit, the market's volatility would have skyrocketed and the potential to gain more money is really high. Essentially, you could make your $1,000 of income by being 10-15% away from the market with high volatility instead of being 6%.

This technique requires weekly trades to be opened, which is a bear. And you have to learn the adjustment techniques, but once understood and accounted for, things are pretty regular and consistent. There is a side benefit of these options being 1256 contracts in the US, so there is beneficial tax treatment. Even though your trades are 1 week long, 60% of the gains are long term cap gains treatment.

So this isn't entirely low risk, but in all of the scenarios where is a bond / stock mix, there is inherent market risk as well. Even bonds that payout 5% can drop in value, so the principal isn't $1M anymore. So finding a great balance is a lot of work.

Selling strangles on broad indexes is a type of diversification, just of a completely different nature.

I have a fairly involved white paper that I have drafted that outlines the strategy for anyone that wants to review it.

because its awesome :)

After rewriting my response 3 times I decided to lay out some basics.

basics

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a. The most common fallacy in investing is that higher risk equates to higher returns.

b. Any half decent investment strategy should have a solid risk management strategy, should account for (and discount) inflation and should have a strategy in place to emulate dollar cost averaging (most commonly by scaling into investments from a cash position or using a re-balancing strategy). Risk management (and discipline to follow it, being the most important).

c. Different sources of returns are taxed very differently, for example: most non-govt interest income is taxed at the marginal tax rate, so if you're at 30% tax rate, 5% interest is actually 3.5%.

Then to be safe deduct the inflation, if the inflation is 2%, the real rate of return is 1.5%.

d. The next thing to consider is the goal of return. Is it geared towards income or growth(compounding).

e. If you are looking at percentage return it implies that you want growth. But that may not be the case. If you instead want an income of $50000 the whole situation changes, even though the value is the same. Simply because, if your investment loses 10% value now your 900k requires a 5.555% return to net the same $50000. I have seen and know a lot of people who went bankrupt for not understanding this, the bigger problem is I know more financial professionals who don't understand the distinction.

example scenarios

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1. If the goal is income, the strategy should be funneled to account for recessionary periods, market corrections etc. I can explain a funnel in more details on request.

2. If its for growth and you want to get a higher return with lesser risk a leveraged risk reduction strategy can be employed. Can explain further on request.

3. For people older than 45 (preferably older that 55) an Insured Annuity is also an nice option when Income is the goal. Even better if they are not healthy (higher mortality risk, higher return).

Before doing anything a good amount of reading(books) would be ideal, start of with:

a. The richest man in Babylon(fiction) - read first, no particular order after this

b. The Ivy Portfolio

c. The intelligent asset allocator

d. The permanent portfolio

e. The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

f. Value Averaging

go back 5 years; I have some IBOC that's just breaking even =)

I'd like to have a read of that with paper. can you post a link?