Pensions, Naked Puts, Low-Sin Investing

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Ding, ding-a-ling, ding, ding-a-ling. It's a listener question special. How many will we get to this time? 4 or 5 or maybe 7. It depends how much time I waste, whether I go fast or slow. Bing bong. Am I doing so far?

Your timbre is great.

I'm a little flu-y and that complicates matters, but we're going to do our best.

And you were on key. That's the— that's the big part that sometimes people miss.

I made that song my own.

You did?

Yeah.

A Jack Howe original.

Hello, everyone, and welcome to the Barron Streetwise podcast. I'm Jack Howe. Listening in, our audio producer Alexis Moore. Hi, Alexis.

Hey, Jack.

It's time for listener questions. It's that most wonderful time of year. Give me a sampling of what kind of topics are we going to touch on today? Don't give too much away.

Okay, I'll be coy. Very investment-focused today. We had a question on—

I would hope it's not automotive repair or this is not going to go well. Go ahead.

There's a question about, how you think of your pension when you're thinking about your asset allocation. We have a question about value versus growth and hedging a downturn. We have a question about options and covered calls versus cash-covered puts. And I don't really know what either of those means, but you're going to explain it to us, right?

It's going to be a delight. It's going to be my pleasure.

Well, let's do it.

Okay. Now I'm really going to push the pace this time. I know you think that I'm going to get sidetracked and go into a bunch of nonsense here. No, no. I'm going to stay very focused. Let's get right into it. Who's up first?

We have Joshua from Ohio who did not send in a voice message, but we still like you, Josh. Thank you. We still appreciate you, Josh. So I'm going to read it.

Go ahead.

Do you want me to say all this stuff about you being a genius and a grill master, or should I skip it?

Grill master? That's a genius I could do without, but grill master?

I'll just skip to the point. So Joshua says, my wife and I are in our mid-40s. We have approximately $1 million in net worth. That's primarily in long-term rental properties and a beach vacation rental property, along with savings and a little Bitcoin. We own zero stocks or bonds. I also have a pension of roughly $5,000 a month from an early retirement. I'm realizing that I need to diversify my portfolio by adding equities and fixed income. My question is, how How should I view my pension when deciding my asset allocation? Should I view it as a fixed income investment in my portfolio, or should I ignore it when making asset allocation decisions?

Thank you, Josh. It's a good question. If you're going to consider this pension as part of your investment assets, and you could, it's something that provides you a regular income, I would call it fixed income. There's an income and it's fixed. Then the question becomes, how much fixed income should you call it? You might be surprised at the amount. $5,000 a month, that's $60,000 a year. How much would you need in investment assets to draw an income of $60,000 a year? The old rule of thumb among retirement planners is to figure on taking out 4% a year. If you use that, you'd be talking about $1.5 million. In other words, that pension is a sizable portion of your investment assets. If what you're getting at here is, How much you should put in stocks versus how much you should put in bonds. There's a lot I don't know about you that would sort of raise or lower your risk tolerance. One is whether you and/or your wife are still working, whether you have an income. Two is how stable the income is on those properties you mentioned. Three is whether you've paid off your house. And on a related note, four is that pension that you mentioned. How much of your spending needs does that cover? Because the main thing that influences your decision of how much of your savings you can put in stocks is how soon might you need to get your hands on the money. If the answer is definitely not anytime soon, then you can afford to put a pretty generous percentage in stocks. You can speak with a financial advisor about these particulars that I mentioned to get a more detailed answer. Good luck. I'm not actually a grill master, by the way, but I do own an apron that says otherwise. Who do we have next, Alexis?

Next up we have Will from Vermont, and I'll play that question now.

Hi, Jack and Alexis. This is Will in Vermont. My question is about shifting a portfolio to a value tilt. Is it ever a good idea? Over the last 5 years, value stocks have significantly underperformed growth stocks, but it feels like growth stocks are due for a correction. Could a value tilt move my portfolio ahead in the case of a downturn? Thanks so much.

Thank you, Will, for the excellent question. Is it ever a good idea to put a value tilt on a portfolio? The short answer is yes. The long answer is I just don't know when. It's hard to tell that sort of thing ahead of time. This is a timely question because as you no doubt have seen, the US stock market has been on a rip-roaring run, the S&P 500. It's dominated by these big tech stocks, especially AI stocks. Lately, just lately, these stocks have started wobbling a little bit. And so a lot of investors looking ahead to 2026 are saying maybe the same things that have worked so well up until now won't continue working. Maybe it's time for a change. Maybe I should hedge. I saw a report from B of A Securities that said large-cap U.S. growth stocks have done so well that maybe it's a good time for small-cap international value stocks, just the opposite. And they said, actually, that group has done pretty well over the years and with lower risk. So they made an argument for those types of stocks. Here's where it gets complicated. I could tell you that the S&P 500 looks expensive relative to earnings. I could tell you that it's looking growthy. It's dominated by these growth stocks. And I could tell you that there are value funds out there that are much cheaper relative to earnings.. But I could also tell you there were a number of points along the way in past years where investors would've been tempted to make the same case and the S&P 500 has kept right on outperforming. In other words, it's difficult to get the timing right on a thing like this. If you wanna buy a value ETF to hedge your, let's say, S&P 500 fund, I don't think there's anything necessarily wrong with that. Buy one with low expenses. There are plenty of choices out there. Personally, I like the idea of buying a dividend fund that happens to be cheap relative to earnings rather than just going after a value fund. We talked about that on a recent episode. How long ago was that, Alexis? It was probably like a few weeks ago.

Yeah, a few weeks at this point-ish.

Ooh.

Yeah. That was in September.

Wait a second. That was in September?

Yeah. Dividends for a Pricey Market with the Franklin Templeton gentleman.

I was going to guess 3 weeks ago. Have we ripped a hole in the space-time fabric? Because I was just watching a YouTube video about that. Hopefully not. Well, in one of these episodes, I talked about how dividend yields have gotten stingy for the stock market, and I don't think it's a bad idea to add some dividend income. It can help provide a cushion in the event of a market downturn. And I pointed to a couple of ETFs. I believe one was SCHD, and you get a bigger dividend yield than the stock market, but it also happens to come with a lower P/E ratio. So it's It's kind of a roundabout way to buy a value fund. Good luck to you, Will. Remember, where there's a Will, there's a way lower price-earnings ratio.

Oh my goodness.

It's terrible. One rule of thumb is never make a joke about someone's name because they've lived with that name their whole life, so they've heard them all already. So it's definitely not new to them. Although this one is so dumb that I'm going to guess Will hasn't heard it before. That is, how many did we do so far? Was it 2?

2 questions.

I mean, I'm worried now you're gonna say, well, like we did 7 based on what you told me about the other episode being in September. Okay. 2 down, a bunch more to come. Are we taking a quick break?

Let's take a quick break.

We'll be right back.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data. Making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. Listener questions special. 2 questions down. How many more are we going to get to? What's the over-under? What are prediction markets saying, Alexis?

Could be 2. Could be 3. Okay. Could be 4.

Yeah. No, it didn't sound like 4 was a very— I mean, okay, let's—

Not likely for sure.

Yeah. Let's see what happens. Who's up next?

Up next, we have Chris from Maine.

Hi, Jack. Coming to you from the great state of Maine. I know you take the long view on your investments, and I do as well, but I was wondering what your thoughts were on using options to build your portfolio and buy and sell your long positions. For example, using covered calls or cash-covered puts? I appreciate your time.

Thank you. Thank you, Chris, and hello to the great state of Maine. I'm going to make this simple and then a little complicated and then simple again. I'm not a fan of these strategies. I think they're complicated. I don't think you get enough in return for the complication. If you're someone who doesn't know whether these strategies are for you, they're probably not for you. What are we talking about? We're talking about stock options and two particular strategies. Options are complicated because there are two basic flavors. There are calls, which is a bet that a stock is going up, and there are puts, which is a bet that a stock is going down. But then there's two ways to do each one. You can buy a contract or you can sell, or what's called write a contract. So depending on which side you're taking, you might be making a bullish bet or a bearish bet. Then you might have an options bet that's covered by underlying shares or not. In terms of risk and exposure, you can have exposure that's finite and small or very large. Let's look at these two strategies in particular. The first is what's called writing covered calls. Let's say you own a stock and let's say that you're pretty sure that that stock is not going to go a lot higher quickly. Maybe it's already had a good run., but you don't want to sell it. So what you could do is you could sell a bet to someone else that that stock is going to go higher quickly, and you would collect the price of that bet. With options, that's called the premium. If the bet doesn't pay off, then you've put that premium in your pocket, basically extra income for you. If the bet does pay off, if that stock shoots higher right after you write a covered call, then you're going to have to forfeit a lot of the upside on that stock. You're going to have to deliver the stock to the person who bought the bet. I am greatly simplifying matters, but that's the basics of how it works. A covered call writing strategy is for someone who wants to generate extra income off of a stock portfolio, and to do that, they're willing to sell some of the potential price upside. The other strategy I believe we're talking about, selling naked puts. Do not be alarmed when we're talking about options. People who are doing naked stuff remain fully clothed. If you're engaging in naked put writing, what you're doing is you're selling bets that a stock is going to go lower, maybe significantly lower in short order. Why would you do that with a stock you don't own? Well, one reason is that maybe you don't mind the idea of owning that stock. Maybe you say to yourself, You know what, I'd buy that stock at $50. I mean, I'm not quite ready or willing to pay $50 a share for the stock, but I'll sell someone else a bet that it's not going to go a lot lower. And if I'm wrong and I end up having to own the stock at $50, well, I don't mind. It's, it's a good stock. It's probably worth $50. That's the thinking of the person who's writing those kinds of puts. And so if they're right and the stock doesn't go significantly lower, they've generated extra portfolio income for themselves., and if they're wrong and the stock goes a lot lower quickly, they could be forced to buy the stock at a higher price than it's currently trading for. They typically would have to have enough cash in the account to guarantee their ability to do that. That's what we mean when we say it's cash covered. It's covered by the amount of cash you need. It's not covered by the underlying stock. Okay. These two strategies in my mind, in my opinion, I don't know. Where the Board of Options would rank these two strategies in terms of their riskiness. But my perception, my opinion, just based on what I've seen in the past, in the distant past when I was a stockbroker and I was handling orders like this for people and I would deal with the same people over many years and see how things go for them, I've never ever seen someone blow themselves up writing covered calls. The worst that happens is they just kind of chronically give up some of the upside in their portfolio. I most definitely have seen people blow vast amounts of cash writing naked puts. And how that usually works, what it looks like is someone develops a thesis on a stock. It's often one particular stock when they lose a lot of money doing this. And they say, it's definitely not going to go below this price. And if it went below that price, gosh darn it, I'd buy as much of it as the world wanted. And then the stock moves lower and then they say, well, it's definitely not going to go below this price. And then they do it again and they become anchored in their beliefs and slow to recognize that either conditions have changed with this company or investors have a new way of thinking about the company. For whatever reason, stocks can go lower than you think and they can stay that way for longer than you think.. And if you become too married to the idea that you wouldn't mind owning such and such stock at such and such price, you could lose a lot of money. At least with a covered call writing strategy, you're constrained by the amount of stocks that you own. With naked put writing, I think it's just too tempting to double down. So I'd stay away from both of these, but I'd especially stay away from that one. I like to keep things simple. It's hard enough to be right on a stock. When you add options, you add time erosion. Now you have to not only be right, you have to be right quickly. In my simple world, either you want to own a stock or you don't. If you want to own it, you should buy it. That's better than selling a bet to someone that it's going to go down and it might get stuck to you if it does go down. Why would you want to only buy it under the worst possible circumstances? And if you don't want to own a stock, you should sell it. That's better to me than selling a bet that may or may not give the bulk of your upside away. Anyhow, that's where I'm at with options. It's also frankly just a lot less work to buy good stocks or a good fund of stocks and hold it for a long time. Thank you, Chris.

Alexis, who else do we have? We have a question from Michael and I don't know where he's from, but it's an interesting question.

You know what, um, when I was in grade school, you know what kids you would say to make fun of someone named Michael? What could it possibly be? I wonder if this is a painful memory for our listener Michael. They would say, Michael, Michael, motorcycle. Which is supposed to be hurtful. It sounds cool. If anything, if anything, you're flattering them. They'd hear someone was named Michael, they'd say, Michael, Michael, motorcycle. I'm not— that's, that's not a burn. Okay.

Okay, let's hear Michael's question. Hi Jack, I'm not a social investor, but I generally don't want to allocate any of my hard-earned resources to companies that may not operate in the best interests of public health. On the one hand, pure social responsibility funds don't have a great performance record—feel free to fact-check me if I'm wrong—but on the other, I'd like to deploy capital in a responsible fashion. Which brings me to my question: are there good investment options that are not, strictly speaking, social investing funds that broadly participate in corporate growth, but are careful to avoid the so-called sin stocks? Thanks, and feel free to punctuate your answer with a big kablooey.

That's a reference to my overuse of the word. I'm not going to say it.

He's trying to tempt me, Alexis. You should say it.

You can have one kablooey. Well, I'll tell you, Michael, I'm not sure I can point you toward a fund for this. First of all, you're right that the track record for these types of funds hasn't been great. There was a moment where what's called ESG investing based on environmental, social, and governance factors really blew up. It became humongous. And there were a lot of these funds launched. And I heard all kinds of people at the time making the case that they would say, not just that this is a way to avoid harm or this is a way to do good. They would say this is a way to beat the stock market. Because the kind of investing that avoids these harmful activities, that's actually a more profitable way to invest. And that sounded highly suspicious to me at the time. Just mathematically, if you're doing something to decrease your investable universe, decrease your opportunity set, I don't really know how that makes your returns larger over time. And what it turned out was that those funds did well for a while because they didn't have a lot of energy and energy was struggling. And then energy turned around and all of a sudden those funds were underperforming. And I don't hear as much now about ESG investing. That's fine if that's what you like. I just don't like it being sold as a return enhancer. It's not. In fact, the right way to position that is to say, here's a type of socially responsible fund or ESG fund that you can buy. And you might find it less objectionable for this or that or the other reason. And it's probably going to be a modest drag on your long-term returns. But maybe you think it's worth it. It's not a moneymaking scheme. Alexis, remember we heard from the CEO of that big tobacco company, the Philip Morris CEO? Yes, we heard from— and there was a, there was a listener who was very angry that we had given a platform to this person who worked in tobacco. You know, he's in the business of selling cigarettes. True. They're also transitioning to sell more non-combustible products like nicotine pouches and heated tobacco sticks. Now, maybe you say it doesn't matter what they're doing. Anybody involved in cigarettes is evil and I don't want any part of it. Fine. That's your view. Maybe you say it's a good thing that they're transitioning from burning tobacco to doing other things that are mitigating the the harm to their customers. Okay. That's fair too. And maybe you say, I don't care what they're transitioning to. If it involves nicotine, whether they're burning it or not, it's bad. And I don't want any part of it. Also. Okay. I figure this is a big publicly traded company. This is part of what's going on in commerce. So we want to hear people out and consider their views and, you know, investors can make their own decisions, but one person might find that highly objectionable and another person might not. Also, when you're talking about a basket of stocks based on a particular ideology, sometimes they don't work exactly as expected. Alexis, is the Dems ETF still beating the MAGA ETFs since— hold on, I got to do some checking. What was the election date in 2024? November 5th. Okay. So if just ahead of the election in 2024, you said, I think that Donald Trump is going to win reelection and I want to make a stock market bet to that effect. I'm going to buy shares of an ETF where the ticker is MAGA. That's called PointBridge America First ETF. And I think, I don't know exactly how they market it, but it's, you know, it's stocks that represent conservative views. And so you bought that the day before the election. And you were right about the election and you've held that ETF since then, you've only made 9%. And someone who made the opposite bet, they said, we think that Donald Trump will lose reelection, therefore we're going to buy the Democratic Large Cap Core ETF. The ticker there is DEMZ, D-E-M-Z. They've made more than 20%. So DEMZ has more than doubled the return for MAGA. If I were that investor who had gotten the thrust of my bet right, but the ETF I bought hadn't acted quite like I thought it would, right now I'd be saying, darn, this is hard picking ideological ETFs. Unless you're not buying it to maximize returns. I don't know. By the way, do not please read some kind of political thing into this difference in returns. That Dems ETF, the top holdings are Apple, Nvidia, Lam Research, Microsoft, and Meta Platforms. It owns a lot of big tech. That's why it's done better. I got off track, Alexis. This was exactly what I promised myself I wouldn't do. Uh, let me get back on track. Michael, I don't have anything for you. I don't have a fund that's going to do exactly what you want in terms of excluding certain types of companies. I think the only route to go if you want to do that is to pick individual stocks. And that's, um, 4 down. Alexis, I know that if I ask you, you're going to tell me we do not have time for one more listener question. What if I promise you that I will keep my answer to 10 seconds?

Then I will pretend to believe you and play a voice note from Scott. Okay. Hi, Jack. This is Scott.

I was wondering if you could explain what a leveraged ETF is or leveraged crypto trading. Thank you.

Clock starts now. Leverage just means borrowing money to amplify returns. I think it's generally not great because half of the battle in investing is you want to be able to survive big downturns and you don't want to amplify your downturns. With ETFs, it can be particularly bad because sometimes the leverage is daily leverage, so the returns don't quite work out the way you would think over time. Leveraged crypto trading, I can't imagine 3 worse words for investors put together. Stop the clock, Alexis.

How many, uh, that was, that was 8 seconds. That was, uh, quite a lot more than 8 seconds, but it was a good answer. Thank you.

I want to thank Will from Vermont and Chris from Maine, Joshua from Ohio, also Michael and Scott. We don't know where they're from, probably somewhere cool, Wisconsin and Louisiana. I'm going to guess if you have a question you'd like played and answered on the podcast, you can send it in. It could be in a future episode. Just use the voice memo app and send it to jack.hough@barons.com. Thank you all for listening. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write us a review.

See you next week. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar. Where data speaks.