I finished this year near the highs of this year with a 23 percent return for my individual account and a 27 percent return for my Roth IRA versus zero percent for the S&P 500. In the third quarter of this year, I decided to change my focus from an absolute return perspective to maximizing my sharpe ratio (i.e. minimizing my volatility for a given level of return). I still have quite a large cash position which I am unwilling to commit due to the high volatility of my portfolio. In this case, I am willing to accept lower levels of return if my volatility is lowered. By focusing on minimizing my volatility, I may be comfortable in committing more capital in my trades. The overall effect of this would be to increase my absolute returns on a dollar basis even if my return on a percentage basis decreases.
My efforts to reduce my portfolio can be partially seen in my Roth IRA — the orange line in the chart located above. I initiated a small position in TZA, a 3x levered short ETF that tracks the Russell 2000, and increased my use of covered calls. I think I will continue to use this strategy to reduce my volatility going forward.
New positions initiated this quarter include a small position in Bank of America which I believe is at an attractive valuation now. I have also conducted research into Research in Motion and Netflix but have not yet initiated any positions.
I don’t anticipate 2012 to be a good year for me because many of my positions are reaching full valuation. My focus for the first half of next year will be to initiate various defensive option positions (ex: covered calls, vertical call spreads) since I don’t anticipate large gains in the short term.
For the next year, I hope to supplement my strategy of fundamental analysis with a more systematic and algorithmic approach to trading. Progress has been slow on this front, but I hope to show readers some preliminary models soon.
I thank the small collection of readers who frequent this pathetic blog, and I encourage readers to continue to comment on reach out to me through e-mail.