My Thoughts on Long Term Investing

During the past week we had a discussion on the Yahoo Group about long term investing. The topic started when someone asked what we thought the market would do if the House passed the rescue bill. My comment was that I didn't care how the market reacted since I'm a long term investor. Them someone asked how I define "long term". Here was my response:

In my opinion, long term investing never really stops. First you invest for retirement, but even once you retire I'm sure you plan to live another 20-30 years, and after that there's your heirs to think about.

My goal leading to retirement is to reinvest the income produced from selling calls, collecting dividends, and from the proceeds of closed positions, in order to compound my returns and grow my account.

After retirement, my goal is to generate an income from the capital I've accumulated by again selling calls, collecting dividends, and from the proceeds of closed positions, without having to touch the principal. Anything left over will be reinvested.

Then after I'm gone, my wife and/or daughter can continue to do the same. And then my grand kids, etc. etc.

So, I guess my definition of long term is forever.

However, I don't believe in putting all of my eggs in the same basket, and as such, I have different portfolios for different purposes. My covered call portfolio only makes up about 30% of my total retirement portfolio.

In my 401K & Vanguard portfolios I hold a variety of assets, including US stock funds, international stock funds, corporate bond funds, Treasury funds, gold funds, and real estate funds. My 401K automatically rebalances every quarter, and I manually rebalance my Vanguard funds when the percentages get out of balance.

At Scottrade, I have a portfolio of closed-end funds that generate monthly and/or quarterly dividends.

At IB, in addition to my CC portfolio, I also have a two stock portfolios, one for long term conservative investments, and one for short term speculative trading.

For my daughters college fund, I have a 529 plan at Fidelity, which is all in fixed income, since the money will be needed in the short term and preservation of capital is critical. I automatically add to that account on a monthly basis.

I also have an emergency fund with about 1 years worth of take home pay, just in case I'm unable to work or get laid off.

As for retirement, there's at least a couple of ways to approach it. One is to accumulated a large sum of money, put it into safe investments, like money market or T-bills and then live off of the principal. Another approach is to continue investing in income producing assets, such as covered calls, dividend paying stocks, real estate (rental), etc. and live off of the income without having to withdraw the principal.

I plan on doing the later and probably won't make to many changes to my investments when I retire in about 7-10 years, except to focus more on income generation and less on capital appreciation. Again with the goal of not having to tap into the principal if at all possible.