Portfolio Update: April 2024 and the AAPL Effect

Big Reality Check

Every once in a while, reality comes to bite you. So far in 2024, I'm feeling that bite.

My largest portfolio is in Merrill Edge, my flagship broker. It's heavily invested in the NASDAQ ETFs with an oversized position in AAPL. Zoomed out, you can see the effect of this volatility. Although It's had some high peaks and nasty troughs, I am beating the S&P since I opened the account.

But is that because I am a savvy investor who uses great options strategies? Not really. Trading short strangles with $2,000 collateral is a drop in the bucket.

The reason I did well for many years is because I hold a lot of AAPL. And since AAPL is doing poorly this year, guess what my portfolio is doing?

Well, that sucks. But I still can't sell AAPL, because I bought this years ago, and selling it would mean losing about $6,500 to taxes. That tax hit isn't worth diversifying.

So where does that leave me? Let's look at the portfolio as a whole.

Merrill Edge Portfolios

This portfolio is most of my money at Merrill Edge, and more than half of my net worth. It's up about 50% overall, but that's because I did a good job of Tax Loss Harvesting during the 2022 bear market where I sold off my red assets. Now, it looks spiffy.

Technology

Starting with the good, half of my portfolio is in tech-heavy ETFs. And another almost 1/6th is in AAPL.

QQQ/M: The largest NASDAQ ETF. QQQM is better because it has a lower management fee at 0.15% vs QQQ's 0.20%. In 2022 when most of my 2020-21 tax lots of QQQ were in the red, I switched to QQQM. The reason I am holding both ETFs is because QQQ is much older, and I bought some of the QQQ shares in 2018 before QQQM even existed. Those positions were green all through 2022, and selling would trigger taxes. The 0.05% fee difference isn't worth paying 10% capital gains tax.

If you're new to investing, QQQM is the better choice. I expect to have the old QQQ shares in this portfolio forever.

AAPL: My source of outperformance and underperformance- a lot rides on AAPL. As one of the largest S&P and NASDAQ constituents, I am LONG AAPL even more that I initially realized. With over $95,000 in AAPL shares, my portfolio is so heavily skewed toward AAPL that it is the deciding factor in whether or not my portfolio beats the market.

I like AAPL. No one goes from AAPL products to non-AAPL; they just go from non-AAPL to AAPL. It's got longevity. But I don't want to be this long AAPL shares. However, selling shares would mean paying about $6,500 in long-term capital gains tax, and the bit doesn't seem worth diversifying. I expect to hold these shares pretty much forever. I do expect AAPL to rise again after they release some AI-driven devices. This isn't the worst stock to hold.

Dividends

I used to hold a lot more dividend stocks after I quit my job at the very end of 2021. At the time, I wasn't sure what my income was going to be like, and I needed the safety net. Now that I don't need the dividend income, I hold about half of what I did before. I am considering dumping more positions, but if I don't, then I'll be happy I own them during the next flat or downward market. Based on my $12,300 expected dividend for 2024, I'll pay about $1,850 in tax.

VIG: By itself, this is most of my dividend portfolio. It's not the heaviest dividend at just under 2%, but it focuses on stocks that increase their dividends regularly and meet other criteria. Over time, my yield-on-cost will increase. It is probably over 2% now.

This combination prevents me from over-collecting on dividends (which cause taxes) and keeps most of the VIG gains in share appreciation. Also, there is evidence that dividend-increasing stocks tend to do better than the rest of the market over time, so VIG should remain a good play.

SCHD: This is probably the most popular dividend ETF, and pays almost 3.5% yield- almost double VIG. It doesn't significantly underperform VIG either, and their long-term returns are neck-and-neck. However, there is a cost to receiving more dividends than share appreciation, and having to pay taxes on SCHD distributions ends up being a drag. Still, I own both to strike a balance, although my VIG is more than 2x the size.

KO, ET, PRU: These are dividend stocks that I bought during the pandemic crash, and they've risen back up substantially. My only regret is that I didn't buy more, especially of ET, which is now paying me close to 15% dividend on my invested capital.

I think these will always be good stocks, and dividend aristocrats in general tend to do well. However, they still won't outperform the market, especially after considering taxes on dividends. While I am fine holdings these, and I can avoid the $1,000 I'd incur in taxes if I sell, I still have no plans to add more. If I increase my dividend positions, it will be in ETFs.

The PFE Play

Guh.

I Went into this position with about $25,000, $15k of which was invested into shares. The other $10k went into 30x PMCCs.

Thesis: I thought PFE would join the Wegovy and Ozempic theme of weight loss drugs, move on from the COVID drugs, and show some exciting new drugs in the pipeline. I couldn't imagine PFE staying beaten-down.

PFE has a lot of debt, and they've been buying companies for the last few years. The money they made off COVID vaccines was supposed to be a boon for their ability to develop new drugs with longer-term demand. We haven't seen anything appreciable manifest yet. My PMCCs suffer.

Play: I bought 30x 0.50 delta LEAPS expiring 12 months out. 0.50 is a low delta for a PMCC, but I expected upside and looked at these as "future 0.70 delta calls) at a discount.

I sold 30x near-term 0.50 delta calls against it, creating a horizontal spread. If this position did get blown, I still had 500x shares that would compensate. I anticipated PFE rising, allowing me to close my whole position for a gain, or even better, allow me to roll my short calls to a higher strike without incurring a debit.

Result: PFE has not risen, and the LEAPS are down 61%. Even though I made some money on the short calls along the way, only the losses on shares are covered and I maintain a red $5,000 position. I am now selling short calls below the strike on my LEAPS, which puts me in a dangerous position.

However, unless PFE shoots up 25% in a month, the LEAPS and shares will recover alongside the short call and should at least give me a breakeven result. I can easily roll from $29 to $30 short strikes if I need.

Roth and SEP IRAs

Beyond my taxable account, I have a Roth and SEP with Merrill. I no longer contribute to these, instead adding to Schwab and Vanguard for my retirement accounts. But since I used Merrill for much longer, the portfolios are larger.

VOO: There isn't much reason to try to beat the market over a decades-long timespan. By just holding shares of S&P ETFs, you're going to multiply your portfolio a few times over. I keep it simple and just hold shares of VOO.

SPLG: Merrill does not have fractional share trading. Since the dividends from VOO and O don't pay for a full share of VOO, I started adding shares of SPLG, which is a similar ETF at a much lower price. This allows me to reinvest faster.

QQQ: I expect that if an index does outperform the S&P, it will be the NASDAQ ETFs. I hold QQQ from years ago. I probably should swap to QQQM since this is a tax-free account, but ngl, I really like the green numbers.

O: For a while, I was on a dividend binge. I have been holdings these shares for years, since about 2018. Over this time, I expected O to continue beyond its new highs in the $70s, but this has not happened. I'm green after accounting for dividends, but this is not an impressive performance from O.

I probably ought to sell these shares, but as I was writing this, decided to sell OTM covered calls expiring in June. If they hit, that's great. I'll keep the $450 premium, sell the shares at $0.04 above breakeven, and reinvest the money into QQQ. If the covered call does not hit, then I got myself a "free" share of QQQ with the dividend and can sell another one expiring in autumn.

Fidelity

Beyond Merrill, I hold a few other accounts with appreciable sums. These are retirement accounts after I moved on from Merrill (mostly due to account type availability, the way they handle options assignment on tax lots, and lack of fractional share trading).

i401(k)s, also called Self-Employed 401(k)s are an option for self-employed people to defer money beyond what they can contribute to a SEP. You need an EIN to get an i401(k), which is just a trip to the IRS website to apply.

VOO: Like my other retirement accounts, I see no reason to make things complicated. Most of my portfolio is VOO.

COWZ: This is an alternative to S&P investing that focuses on "Cash Cows," ie companies that have extensive free cash flow and tend to be among the best S&P stocks on the index. There is some evidence that these stocks end up beating the S&P, and so far they are slightly ahead of my VOO positions in terms of percent. However, this may be due to me buying larger tax lots of VOO more recently than COWZ, which skews the results.

Way Ahead

I am a pretty average investor. If I beat the market, it's because I bought a good stock. AAPL was that stock for a while, and probably will be again in the future; it just isn't today.

At this point, I am much more interested in avoiding losses than I am in making big gains. All I need to do now is not screw up.

I intend to start opening short strangles again if VIX spikes above 20. I used the strategy extensively in 2022-3 and profited almost every time. With VIX getting back up to the high teens, this may be on the table again. The positions will still be small, a fraction of 1% of my portfolio.