HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 11:56 am

Sola Scriptura wrote:
Thu Feb 07, 2019 11:32 am
Jags4186 wrote:
Thu Feb 07, 2019 10:51 am
Sola Scriptura wrote:
Thu Feb 07, 2019 10:03 am
HEDGEFUNDIE,

What I still don't understand, given your data and given everything that's been said, is that if this strategy is only 15% of your total portfolio, how do you not already have enough downside protection built in, thus enabling you to go 100% UPRO regardless of the potential for a 95% drawdown in a 2008-like scenario? In a single-day 33.33% drop, you'd be screwed anyway, so why not let 100% UPRO ride and take your chances on hitting that $10MM goal much sooner?
In a singlthe day 33.33% drop he wouldn’t be screwed. He’s be out 40% of this section of his portfolio, long term treasuries would likely rally, and he could rebalance back into a leveraged ETF.
You're right; my mistake. I overstated my case and didn't provide enough detail. What I meant is that being wiped out completely on his 40% would take a while to recover from if current low (relative to the past) treasury yields persist, even with a presumed rally (which could actually end up being more modest than you suppose). HEDGEFUNDIE has stated elsewhere that he doesn't have a long period to recover, so how much time are you assuming would be available for him to slowly move back into a leveraged ETF position?
The entire premise of my strategy rests upon the idea that when one asset collapses, the other asset rises sharply. If you don’t believe this will happen reliably going forward, you should not undertake this strategy. I am comfortable on this point, both because of historical returns and the underlying risk story of why this occurs. Here is the historical evidence:

Image

There is no “slowly moving back”. My rule is to rebalance into 40/60 every quarter, no exceptions.

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Oicuryy
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Oicuryy » Thu Feb 07, 2019 12:34 pm

EfficientInvestor wrote:
Thu Feb 07, 2019 9:20 am
The UPRO data is based on daily returns of VFINX and includes a 1% per year expense ratio (I subtract .01/250 for each day). I initially used ^GSPC as the data source, but forgot that I had switched to using VFINX because it accounts for the dividend. If you only use data from ^GSPC, your proxy will underperform UPRO. For each day, I did a weighted average of the close value (20%) and adjusted close value (80%). I determined the weighting using an iterative process until I found something that closely matched the actual UPRO performance.
Are you sure UPRO uses the S&P 500 total return index and not the price index? I could not find a clear answer on ProShares site. It sort of sounds like you are torturing the data until it confesses.

Ron
Money is fungible | Abbreviations and Acronyms

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hdas
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hdas » Thu Feb 07, 2019 12:37 pm

HEDGEFUNDIE wrote:
Thu Feb 07, 2019 11:56 am

The entire premise of my strategy rests upon the idea that when one asset collapses, the other asset rises sharply. If you don’t believe this will happen reliably going forward, you should not undertake this strategy. I am comfortable on this point, both because of historical returns and the underlying risk story of why this occurs. Here is the historical evidence:
To some extent, the success of most BH's "balanced" portfolios is predicated on the same reasoning. The interesting question is under what scenarios a 40/60 unlevered cheap portfolio does ok (10, 20, 30 years out) but your 3X ETF doesn't or the performance is underwhelming. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Starper » Thu Feb 07, 2019 12:41 pm

Great post.

OP, you mentioned that you trade futures and use Roth Ira to avoid negative tax consequences.

Could you elaborate on that a little? Which Roth Ira provider? What's your strategy? How much money do you need in Roth Ira for this strategy to make sense?

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vineviz
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 12:44 pm

random_person wrote:
Thu Feb 07, 2019 11:42 am
Volatility decay is not just the idea that the ETF can under perform the benchmark. The ETF rebalances daily so it WILL differ from the benchmark. When the market strongly trends in one direction for awhile, it will tend to out perform and when it mean reverts, then it will tend to under perform.

Volatility decay is the idea that variance itself causes the ETF to under perform, and it doesn't. The variance just causes the center of the distribution to be gutted, while pushing more positive results to the extremes.
I think you misunderstand what "volatility decay" actually means. It doesn't mean that "variance itself causes the ETF to underperform". I've never seen anyone use the term to mean that except you.

Instead, "volatility decay" or "volatility drag" describes precisely the phenomenon I illustrated: during multi-day periods in which the mean return is near zero but volatility is not zero, a daily leveraged ETF does NOT produce 3x the result of the underlying asset. More specifically — during that specific market environment — it is virtually certain to produce a lower return than 3x the underlying asset, reasonably certain to produce less than 1x the underlying asset, and possibly may return a loss despite a gain for the underlying asset.

This is very easy to observe. I took my simulated 3x data from 1970 to present and sorted the monthly returns for the US market into quintiles (quintile 1 is the 10% of months with the lowest monthly return, quintile 10 is the 10% of months with the highest monthly return) and plotted the underperformance of the daily leveraged fund relative to a notional "3x the index" return.

Image

You can see that the underperformance (relative to a naive 3x benchmark) is not even across the quintiles as it would be if this was merely a function of expenses and trading costs. Instead, in the edge quintiles (1&2 and 7-10) the daily leveraged fund returned approximately 3x the return of the underlying index .

In the middle quintiles, however, the near-zero mean monthly return of the underlying index caused the leveraged ETF to underperform by anywhere from 50% to 300% (or stated alternately, 80 bps to 123 bps per month).

In other words, "volatility decay" is not a constant feature of daily leveraged ETFs but it IS a phenomenon that frequently manifests. Any investor intending to use the ETFs as a long-term investment vehicle needs to understand this phenomenon IMHO.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by jaj2276 » Thu Feb 07, 2019 12:45 pm

bgf wrote:
Wed Feb 06, 2019 8:30 pm
jaj2276 wrote:
Wed Feb 06, 2019 8:25 pm
bgf wrote:
Wed Feb 06, 2019 8:17 pm
i dont understand one thing. why not put all 15% in UPRO?

we're only talking about 15% of your portfolio to begin with, an amount you are willing and able to lose, potentially.

i get the hogwash about higher sharpe ratios yada yada but why do you care? who cares if the sharpe ratio is higher? again, this 15% is on "lock down," so the volatility should be irrelevant to you. your one and only focus should be maximizing return. why else invest in a 3x ETF?

just go 15% UPRO and let it rip for 20 years.
I don't know the quantifiable reason but I suspect it's due to being able to buy more UPRO throughout the course of the strategy using the overweighted holding of TMF. If you only held UPRO then of course you'd end up with UPROs returns. But if you held both and you rebalanced, then a few of those times you'd buy "more UPRO" and eventually have more units of UPRO (with some TMF to boot) than simply starting with the entire portfolio dedicated to UPRO.
i get what you're saying. its no different than rebalancing from bonds into stock... problem is, in both cases your expected return is lower. rebalancing does not boost returns when you are rebalancing from a lower return instrument to a higher one. you're better off just owning 100% of the higher returning asset 100% of the time.
Hi bgf,

I've see you moved on from me (no worries!) but your question got me to look at this a bit further.

I downloaded as much historical data for UPRO and TMF that Yahoo Finance would allow me to. I then set the starting date of the exercise to be 2/8/2010. I am starting with 50k and my rebalance rule is the following:

On the ending day of 3 months (April, August, December), calculate the amount of UPRO to buy or sell to get back to target equity exposure of portfolio value. On that same day, do the same for TMF (except rebal to 1-equity exposure of PV). The following day I would put in orders to get the closing price of UPRO and TMF in the quantities I calculated from the previous day. My assumption is that my orders would be too small to move the closing price against me.

There have been 27 rebalancing opportunities since the start of this portfolio. I assume that there will be a rebal every opportunity because the chances of the portfolio being exactly split is very low. For the time period I've chosen, 15 of the 27 rebalancing opportunities were selling UPRO to buy TMF and 12 were selling TMF to buy UPRO. There were 2264 trading days.

The final portfolio value (as of 2/6/19), min portfolio value, max portfolio value, and # of days 100% UPRO was higher than max of this portfolio:

100% UPRO/0% TMF : $636,166.36, $43,560.03, $832,403.98,0
90% UPRO/10% TMF : $662,143.66, $47,260.00, $821,187.78,6
80% UPRO/20% TMF : $654,691.07, $50,000.00, $785,503.98,38
70% UPRO/30% TMF : $618,151.02, $50,000.00, $720,853.28,87
40% UPRO/60% TMF : $404,255.09, $48,818.26, $442,052.78,494

So I think this shows both points. The highest portfolio value will definitely be a 100% UPRO portfolio.

However, there are other portfolios that will give you higher values on random days. If we were to take "yesterday" as the random day then you would have more money with a non-100% UPRO portfolio if your other options were 90/10, 80/20, or 70/30 and you rebalanced how I've rebalanced.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by unclescrooge » Thu Feb 07, 2019 12:46 pm

hdas wrote:
Thu Feb 07, 2019 12:37 pm
HEDGEFUNDIE wrote:
Thu Feb 07, 2019 11:56 am

The entire premise of my strategy rests upon the idea that when one asset collapses, the other asset rises sharply. If you don’t believe this will happen reliably going forward, you should not undertake this strategy. I am comfortable on this point, both because of historical returns and the underlying risk story of why this occurs. Here is the historical evidence:
To some extent, the success of most BH's "balanced" portfolios is predicated on the same reasoning. The interesting question is under what scenarios a 40/60 unlevered cheap portfolio does ok (10, 20, 30 years out) but your 3X ETF doesn't or the performance is underwhelming. :greedy
I would think an extended period of slowly increasing interest rates and a choppy sideways stock market would lead to underperformance.

I don't have the bandwidth to do the calculations, but I would be interested in seeing how this would play out over a several year period.

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vineviz
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 12:50 pm

hdas wrote:
Thu Feb 07, 2019 9:38 am
vineviz wrote:
Thu Feb 07, 2019 9:09 am
it is wise to employ risk mitigation strategies when using them long-term.
Can you mention examples of these risk mitigation strategies that when employed systematically and properly backtested don't diminish the profits to the extent of rendering the whole enterprise unprofitable? :greedy
One strategy is the one the OP is using, which is essentially a risk parity approach multiple two uncorrelated assets,

Another strategy would be a target volatility approach, so that the capital allocated to this leveraged strategy was adjusted to maintain a relatively constant level of expected volatility.

A third strategy (which could be combined with the other two)is the one I mentioned earlier of building a glide path target of net equity exposure so that as the target is approached the amount of leverage is slowly decreased. In principle, this would provide less leverage when the portfolio had grown so that risk is dialed down when it would be hardest to recover from a poor sequence of returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor » Thu Feb 07, 2019 12:55 pm

Oicuryy wrote:
Thu Feb 07, 2019 12:34 pm
EfficientInvestor wrote:
Thu Feb 07, 2019 9:20 am
The UPRO data is based on daily returns of VFINX and includes a 1% per year expense ratio (I subtract .01/250 for each day). I initially used ^GSPC as the data source, but forgot that I had switched to using VFINX because it accounts for the dividend. If you only use data from ^GSPC, your proxy will underperform UPRO. For each day, I did a weighted average of the close value (20%) and adjusted close value (80%). I determined the weighting using an iterative process until I found something that closely matched the actual UPRO performance.
Are you sure UPRO uses the S&P 500 total return index and not the price index? I could not find a clear answer on ProShares site. It sort of sounds like you are torturing the data until it confesses.

Ron
The best I can tell is that it’s somewhere in the middle. UPRO obtains a broad exposure to the index by putting a large portion of funds into individual stocks or unleveraged ETFs. Then, with a small portion of the funds, they use futures and swap contracts to hit the 3x daily goal. By holding the individual stocks and ETFs, they generate a dividend which is currently around 0.5% per Yahoo. Due to this dividend, UPRO is achieving better performance than just 3x the daily ^GSPC (or daily close of VFINX) performance. However, since they can’t apply leverage to that dividend, you can’t assume they will meet the 3x daily performance of the adjusted close of VFINX. Therefore, the actual performance of UPRO is somewhere in the middle. Enter the use of the weighted average. The 20/80 blend that I am using matches actual performance of UPRO quite well over the last 9+ years, so I feel comfortable using that blend going further in the past. If you want to be more conservative, feel free to just use the ^GSPC data without adjusting for dividend.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by EfficientInvestor » Thu Feb 07, 2019 1:04 pm

unclescrooge wrote:
Thu Feb 07, 2019 12:46 pm
hdas wrote:
Thu Feb 07, 2019 12:37 pm
HEDGEFUNDIE wrote:
Thu Feb 07, 2019 11:56 am

The entire premise of my strategy rests upon the idea that when one asset collapses, the other asset rises sharply. If you don’t believe this will happen reliably going forward, you should not undertake this strategy. I am comfortable on this point, both because of historical returns and the underlying risk story of why this occurs. Here is the historical evidence:
To some extent, the success of most BH's "balanced" portfolios is predicated on the same reasoning. The interesting question is under what scenarios a 40/60 unlevered cheap portfolio does ok (10, 20, 30 years out) but your 3X ETF doesn't or the performance is underwhelming. :greedy
I would think an extended period of slowly increasing interest rates and a choppy sideways stock market would lead to underperformance.

I don't have the bandwidth to do the calculations, but I would be interested in seeing how this would play out over a several year period.
If someone could point me in the direction of some daily data for either intermediate or long term treasuries, I would be happy to run the calcs and post results. Unfortunately, the best I can find at this point is VUSTX and it only goes back to 1987. It would be ideal to get data going back to at least 1970 to see performance during the rising interest rate period that occurred until 1984ish. ^GSPC goes back to 1950, so I have the necessary stock data.

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hdas
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hdas » Thu Feb 07, 2019 1:09 pm

EfficientInvestor wrote:
Thu Feb 07, 2019 1:04 pm

If someone could point me in the direction of some daily data for either intermediate or long term treasuries, I would be happy to run the calcs and post results. Unfortunately, the best I can find at this point is VUSTX and it only goes back to 1987. It would be ideal to get data going back to at least 1970 to see performance during the rising interest rate period that occurred until 1984ish. ^GSPC goes back to 1950, so I have the necessary stock data.
The expert resident is Longinvest. Here. :greedy
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hdas
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hdas » Thu Feb 07, 2019 1:12 pm

HEDGEFUNDIE wrote:
Thu Feb 07, 2019 11:56 am
Here is the historical evidence:

Image
Can you run a MC Simulation on PV and post the output. Thanks :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 1:12 pm

jaj2276 wrote:
Wed Feb 06, 2019 8:09 pm
How are you determining that his equity exposure target at age 40 is $600k?
Mostly I was making up a number to use as an example, but the idea is borrowed from the concept of lifecycle investing as described in the book of that name by Ayres and Nalebuff. http://lifecycleinvesting.net/index.html

In essence, they describe a four step process:

1) Estimate your "Relative Risk Aversion" (RRA) score.
2) Use the RRA to calculate your "Samuelson Share" (the percentage of the PV of your current and future retirement savings that you should expose to stocks).
3) Estimate the present value of current and future retirement savings.
4) Multiply your Samuelson Share by the PV of current and future retirement savings to arrive at the dollar amount you should expose to stocks in the current year.

The "Resources" tab on their website has downloadable Excel files you can use to perform these calculations.

Essentially what they are describing is time diversification which, their words, "makes it possible to earn the same return with lower risk or a higher return for the same risk." For someone whose current savings are low relative to their future savings (i.e. someone younger) and who is not extremely risk averse, this might mean that the optimal diversification strategy is to allocate more than 100% of the current portfolio to equities at the early stages of their lifetime.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by random_person » Thu Feb 07, 2019 1:14 pm

vineviz wrote:
Thu Feb 07, 2019 12:44 pm

I think you misunderstand what "volatility decay" actually means. It doesn't mean that "variance itself causes the ETF to underperform". I've never seen anyone use the term to mean that except you.

The results that you are observing demonstrate that the underlying data is mean reverting over the time horizon that you are looking at. The stronger the mean reversion, the stronger the effect. That is why you see the under performance being stronger when near the center of the distribution.

If you understand the theory that the volatility itself doesn't cause under performance, and we are in the world of simulated data, then the under performance has to come from mean reversion in the underlying data. This is why I think its so important to understand that it is not the volatility that causes lagging returns but the negative correlation between today's return and future returns. It causes you to increase your position at the wrong time.

Now it may be true that stock returns, within a month, are mean reverting in general. But this is not necessarily true over different time horizons.

As I said before, lets see the yearly performance of the simulated data in all possible years, especially years like 2008 and 2017, and that will prove that the opposite result is definitely possible.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 1:56 pm

random_person wrote:
Thu Feb 07, 2019 1:14 pm
The results that you are observing demonstrate that the underlying data is mean reverting over the time horizon that you are looking at. The stronger the mean reversion, the stronger the effect. That is why you see the under performance being stronger when near the center of the distribution.
Whether or not mean reversion exists is irrelevant to the phenomenon that the term "volatility decay" is describing. Moreover, mean reversion is neither sufficient or necessary to explain volatility decay.

Volatility decay exists under a specific set of conditions, which can be (simplistically) summarized as a period in which the mean return is near zero and the variance of returns is NOT near zero. That's it.

When those conditions are true, the return of the leveraged ETF will be less than 3x (or whatever) the return of the underlying asset and we say volatility decay is present.

When those conditions are NOT true, the return of the leveraged ETF will approximately 3x (or whatever) the return of the underlying asset and we say volatility decay is not present.

It's true that variance ALONE doesn't cause the decay: you need a mean return near zero and the presence of variance both. If that's the point you're trying to make, then I'd just say that.

But you don't see the decay in situations of highly positive returns and high variance, highly negative returns and high variance, highly positive returns and low variance, highly negative returns and low variance, or near-zero returns and low variance. Only in the special case of near-zero returns and high variance do you observe the decay, which is why it is call volatility drag or decay.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by samsdad » Thu Feb 07, 2019 2:29 pm

I'm in as of a few minutes ago at 50/50 for $5k. I'll be rebalancing quarterly.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by random_person » Thu Feb 07, 2019 2:45 pm

vineviz wrote:
Thu Feb 07, 2019 1:56 pm


Volatility decay exists under a specific set of conditions, which can be (simplistically) summarized as a period in which the mean return is near zero and the variance of returns is NOT near zero. That's it.
That is the definition of mean reversion.

Anyway, I really would like to see 2008 and 2017 yearly returns.

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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 2:52 pm

I have received some PMs asking whether there is a minimum dollar amount below which this strategy becomes impractical or not worth the time/effort.

This is really more a question about the transaction costs of rebalancing. I am using M1 Finance for this strategy and they offer free rebalancing. So if there are no transaction costs, then no, I don't think there is a "minimum" amount that would work for this.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by TM90 » Thu Feb 07, 2019 2:59 pm

Question: if you think you've found an easy way to beat the market why hasnt anybody else done it before?

jaj2276
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by jaj2276 » Thu Feb 07, 2019 3:01 pm

HEDGEFUNDIE wrote:
Thu Feb 07, 2019 2:52 pm
I have received some PMs asking whether there is a minimum dollar amount below which this strategy becomes impractical or not worth the time/effort.

This is really more a question about the transaction costs of rebalancing. I am using M1 Finance for this strategy and they offer free rebalancing. So if there are no transaction costs, then no, I don't think there is a "minimum" amount that would work for this.
I'm sure you're going to rue the day you brought this up!

Anyways I'm in the process of moving a small Roth IRA to M1 Finance. A few questions for you if you don't mind.

1) I created a "Pie" containing two slices (UPRO & TMF) in the percentages I'm looking at (50 and 50). When I invest in my Pie, will I actually own UPRO & TMF (i.e the Pie isn't an actual thing) or will I own my PIE that will be backed by the value of UPRO & TMF?

2) When rebalancing, do you simply "rebalance" your pie (M1 knows the PIE is 50/50 UPRO/TMF and when you say rebalance they'll buy and sell enough UPRO and TMF to get you back to 50/50)? Is this rebalance automatic or on demand?

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by random_person » Thu Feb 07, 2019 3:05 pm

I have one piece of practical advise for those considering this strategy. There is a very strong demand for shorting these ETFs on different brokerages. Depending on which brokerage you use, you can get a percentage of the fees the broker earns for lending out your shares.

For example, Interactive Brokers gives you 50% of the short lending revenue and your shares are very likely to be lent for these types of ETFs.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by bgf » Thu Feb 07, 2019 3:07 pm

below is the same strategy using 3x international developed and 3x emerging markets. international and emerging market strategies are far more pedestrian.

makes me wonder what you should reasonably expect moving forward.

https://www.portfoliovisualizer.com/bac ... tion4_3=40
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by vineviz » Thu Feb 07, 2019 3:11 pm

TM90 wrote:
Thu Feb 07, 2019 2:59 pm
Question: if you think you've found an easy way to beat the market why hasnt anybody else done it before?
A) Who says nobody hasn't done this before?

B) Beating the market has always been "easy": if you're willing and able to take on more risk then you can generally beat the market. The capital allocation line continues up and to the right of the tangency portfolio in the classic "efficient frontier" illustrations to show precisely this.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 3:15 pm

random_person wrote:
Thu Feb 07, 2019 2:45 pm
That is the definition of mean reversion.
That might be what you think mean reversion means, but I challenge you to provide a source that agrees with you.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by TM90 » Thu Feb 07, 2019 3:46 pm

vineviz wrote:
Thu Feb 07, 2019 3:11 pm
TM90 wrote:
Thu Feb 07, 2019 2:59 pm
Question: if you think you've found an easy way to beat the market why hasnt anybody else done it before?
A) Who says nobody hasn't done this before?

B) Beating the market has always been "easy": if you're willing and able to take on more risk then you can generally beat the market. The capital allocation line continues up and to the right of the tangency portfolio in the classic "efficient frontier" illustrations to show precisely this.

Image

Fair point but if this strategy delivered so much better returns why aren't the bogleheads actively recommending it? I mean why aren't we all investing with leverage? Volatility aside.

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hdas
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by hdas » Thu Feb 07, 2019 3:48 pm

Looking at futures data, properly roll adjusted.

1. Here's UPRO vs 3x futures exposure

Code: Select all

Portfolio			Initial Final 		CAGR	Stdev	Best 	Worst 	Max. DD
UPRO				$10,000	$182,271 	35.38% 	38.86%	118.49%	-25.15%	-47.03%
3X E-mini S&P 500 Futures	$10,000	$220,808 	38.12% 	43.66%	129.94%	-26.12%	-53.14% 
2. Here's TMF vs 3x futures exposure

Code: Select all

Portfolio			Initial Final 		CAGR	Stdev	Best 	Worst 	Max. DD
TMF				$10,000	$19,723  	7.21% 	38.06%	109.14%	-39.01%	-49.74%
3X U.S. Treasury Bond Futures	$10,000	$25,864	 	10.24%	29.79% 	89.61%	-29.55%	-43.12% 
3. Here's the diff between the two 40/60 portfolios with Q rebalancing

Image

3. Here's the path since Sep 1997 (start date of data for MiniSP futures)

Image
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by aristotelian » Thu Feb 07, 2019 3:51 pm

TM90 wrote:
Thu Feb 07, 2019 3:46 pm
Fair point but if this strategy delivered so much better returns why aren't the bogleheads actively recommending it? I mean why aren't we all investing with leverage? Volatility aside.
Anyone who has ever had a mortgage has invested with leverage. It's all a matter of risk tolerance.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by vineviz » Thu Feb 07, 2019 3:56 pm

TM90 wrote:
Thu Feb 07, 2019 3:46 pm
vineviz wrote:
Thu Feb 07, 2019 3:11 pm
TM90 wrote:
Thu Feb 07, 2019 2:59 pm
Question: if you think you've found an easy way to beat the market why hasnt anybody else done it before?
A) Who says nobody hasn't done this before?

B) Beating the market has always been "easy": if you're willing and able to take on more risk then you can generally beat the market. The capital allocation line continues up and to the right of the tangency portfolio in the classic "efficient frontier" illustrations to show precisely this.

Image

Fair point but if this strategy delivered so much better returns why aren't the bogleheads actively recommending it? I mean why aren't we all investing with leverage? Volatility aside.
I don’t think you can just put volatility aside. The volatility inherent with the leveraged strategy is almost surely what prevents the vast majority of investors from being comfortable with a leveraged strategy like this.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 4:00 pm

TM90 wrote:
Thu Feb 07, 2019 3:46 pm
vineviz wrote:
Thu Feb 07, 2019 3:11 pm
TM90 wrote:
Thu Feb 07, 2019 2:59 pm
Question: if you think you've found an easy way to beat the market why hasnt anybody else done it before?
A) Who says nobody hasn't done this before?

B) Beating the market has always been "easy": if you're willing and able to take on more risk then you can generally beat the market. The capital allocation line continues up and to the right of the tangency portfolio in the classic "efficient frontier" illustrations to show precisely this.

Image

Fair point but if this strategy delivered so much better returns why aren't the bogleheads actively recommending it? I mean why aren't we all investing with leverage? Volatility aside.
How long have you been on Bogleheads? People here get criticized for holding 90/10 portfolios, much less a leveraged portfolio.
Last edited by HEDGEFUNDIE on Thu Feb 07, 2019 4:07 pm, edited 1 time in total.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 4:02 pm

jaj2276 wrote:
Thu Feb 07, 2019 3:01 pm
I'm sure you're going to rue the day you brought this up!

Anyways I'm in the process of moving a small Roth IRA to M1 Finance. A few questions for you if you don't mind.

1) I created a "Pie" containing two slices (UPRO & TMF) in the percentages I'm looking at (50 and 50). When I invest in my Pie, will I actually own UPRO & TMF (i.e the Pie isn't an actual thing) or will I own my PIE that will be backed by the value of UPRO & TMF?
You will own the actual ETFs.
2) When rebalancing, do you simply "rebalance" your pie (M1 knows the PIE is 50/50 UPRO/TMF and when you say rebalance they'll buy and sell enough UPRO and TMF to get you back to 50/50)? Is this rebalance automatic or on demand?
One-button rebalance to your original split, on demand.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by random_person » Thu Feb 07, 2019 4:19 pm

vineviz wrote:
Thu Feb 07, 2019 3:15 pm
random_person wrote:
Thu Feb 07, 2019 2:45 pm
That is the definition of mean reversion.
That might be what you think mean reversion means, but I challenge you to provide a source that agrees with you.
https://www.investopedia.com/terms/m/meanreversion.asp

First link on google.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by vineviz » Thu Feb 07, 2019 4:24 pm

random_person wrote:
Thu Feb 07, 2019 4:19 pm
vineviz wrote:
Thu Feb 07, 2019 3:15 pm
random_person wrote:
Thu Feb 07, 2019 2:45 pm
That is the definition of mean reversion.
That might be what you think mean reversion means, but I challenge you to provide a source that agrees with you.
https://www.investopedia.com/terms/m/meanreversion.asp

First link on google.
As I said, the challenge is to find a source that AGREES with you.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by hdas » Thu Feb 07, 2019 4:29 pm

hdas wrote:
Thu Feb 07, 2019 1:12 pm
Can you run a MC Simulation on PV and post the output. Thanks :greedy
Here it is:

Image

Image


Last thing, we are waiting on the 1960-1980 data to see :twisted:
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by samsdad » Thu Feb 07, 2019 4:48 pm

HEDGEFUNDIE wrote:
Tue Feb 05, 2019 3:42 pm
Iridium wrote:
Tue Feb 05, 2019 3:35 pm
Hedgiefundie, out of curiosity, what is your rebalancing strategy? I wish you the very best of luck over the next couple of decades.
Rebalance to 60% TMF / 40% UPRO every quarter. This had the best results in the backtest and I had no better justification for any other timing.
Now that I'm in this too for 50/50 for $5k, may I ask if you're using March 31, June 30, September 30, and December 31 as your rebalancing days?

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by random_person » Thu Feb 07, 2019 4:51 pm

I think someone should do this test: during the time period in which 3X leveraged ETFs existed, compare the performance of the simulated 3X leveraged ETF to the actual 3X leveraged ETF. Let's see if the simulated data are anywhere close to the actual results.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by samsdad » Thu Feb 07, 2019 4:57 pm

random_person wrote:
Thu Feb 07, 2019 4:51 pm
I think someone should do this test: during the time period in which 3X leveraged ETFs existed, compare the performance of the simulated 3X leveraged ETF to the actual 3X leveraged ETF. Let's see if the simulated data are anywhere close to the actual results.
Already done upthread I thought. I can verify that both the URPO and TMF data sets that I downloaded from EfficientInvestor upthread match closely (actually slightly understate) the "real" UPRO and TMF performance.

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 4:58 pm

samsdad wrote:
Thu Feb 07, 2019 4:48 pm
HEDGEFUNDIE wrote:
Tue Feb 05, 2019 3:42 pm
Iridium wrote:
Tue Feb 05, 2019 3:35 pm
Hedgiefundie, out of curiosity, what is your rebalancing strategy? I wish you the very best of luck over the next couple of decades.
Rebalance to 60% TMF / 40% UPRO every quarter. This had the best results in the backtest and I had no better justification for any other timing.
Now that I'm in this too for 50/50 for $5k, may I ask if you're using March 31, June 30, September 30, and December 31 as your rebalancing days?
I started on Feb 4, so I'm rebalancing every three months from that date. Does not matter unless you think there is something special about actual calendar quarters. Welcome to the dark side :)
random_person wrote:
Thu Feb 07, 2019 4:51 pm
I think someone should do this test: during the time period in which 3X leveraged ETFs existed, compare the performance of the simulated 3X leveraged ETF to the actual 3X leveraged ETF. Let's see if the simulated data are anywhere close to the actual results.
We're getting to the point where we need a wiki to point people to questions that have already been asked and answered...
viewtopic.php?f=10&t=272007#p4364947

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Strategy Optimization

Post by hdas » Thu Feb 07, 2019 5:13 pm

Within the mostly fun department. The best portfolio is the one optimizing monthly based on previous 12 months. Provided Portfolio == 40/60 3x Levered.

Incidentally, since cash is an option. The model is in cash now.

Image

Image

Cheers :greedy
Last edited by hdas on Sun Feb 10, 2019 10:57 pm, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by finite_difference » Thu Feb 07, 2019 5:41 pm

Are there any 3x-leveraged S&P 500 funds that survived 2008?

If not, I’m somewhat skeptical what would happen when there’s a huge market crash, like one that’s capable of taking down major financial firms.

I am not quite sure how I understand how a margin call would work for an ETF. Is it secured by the firm managing the ETF?
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by samsdad » Thu Feb 07, 2019 5:51 pm

HEDGEFUNDIE wrote:
Thu Feb 07, 2019 4:58 pm
I started on Feb 4, so I'm rebalancing every three months from that date. Does not matter unless you think there is something special about actual calendar quarters. Welcome to the dark side :)
I don't know if there's something special about calendar quarters. Just paranoid I suppose.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by EfficientInvestor » Thu Feb 07, 2019 5:59 pm

finite_difference wrote:
Thu Feb 07, 2019 5:41 pm
Are there any 3x-leveraged S&P 500 funds that survived 2008?

If not, I’m somewhat skeptical what would happen when there’s a huge market crash, like one that’s capable of taking down major financial firms.

I am not quite sure how I understand how a margin call would work for an ETF. Is it secured by the firm managing the ETF?
There are some 2X funds that have been around prior to 2008, but not any 3X. I don't think it is because the 3X funds crashed and vanished. I just don't think they had been created yet. If anyone knows otherwise, I would be interested to hear. If you want to see results of a 2X portfolio starting in 2006, see my post in the thread from Tue Feb 05, 2019 9:40 pm.

If you want to see if a 3X fund can survive horrible returns and still stay afloat, take a look at NUGT (3X Gold Miners). The link below is a comparison of NUGT to GDX, the unleveraged ETF. As you can see, it has not been an easy road for NUGT. Despite that, it still has over $1.4 Billion in net assets.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by staythecourse » Thu Feb 07, 2019 6:10 pm

hdas wrote:
Thu Feb 07, 2019 4:29 pm
Last thing, we are waiting on the 1960-1980 data to see :twisted:
What I really want to see is this analysis done on the data set from 1950-1970. That is more representative of what LIKELY will happen with interest rates going forward, i.e. starting low and slowly going up each and every year. Does ANYONE have the data for this period of time?

I love this concept, but just don't trust a data set where we know in RETROSPECT sp500 and LTT shot the lights out. Don't know where I read it, but think it was Dr. Bernstein in "TIAA" where he said the best diversifier to stocks from 1950-1970 was cash and not LTT. Makes sense as slowly increasing interest rates should have lower correlation with LTT. I am pretty sure I am not imagining that.

Either way I do love the idea. I still have not gotten an answer for stewardship issues if we have a 2008 scenario and the fund has HUGE outflows and gets shut down. Also, I love this idea if we were talking about it when the SP500 was NOT shooting out the lights.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Oicuryy » Thu Feb 07, 2019 6:14 pm

EfficientInvestor wrote:
Thu Feb 07, 2019 12:55 pm
If you want to be more conservative, feel free to just use the ^GSPC data without adjusting for dividend.
I tried that. Compounding my simulated daily returns for the years from 1987 through 2018 gives an ending value of 40.65. Yours for the same period gives 141.20. For comparison, Yahoo's adjusted close for VFINX gives 20.32.

Did a 3x etf become 2x or 7x over thirty-two years? Does reinvesting the UPRO dividends really make that big a difference?

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by unclescrooge » Thu Feb 07, 2019 6:17 pm

random_person wrote:
Thu Feb 07, 2019 3:05 pm
I have one piece of practical advise for those considering this strategy. There is a very strong demand for shorting these ETFs on different brokerages. Depending on which brokerage you use, you can get a percentage of the fees the broker earns for lending out your shares.

For example, Interactive Brokers gives you 50% of the short lending revenue and your shares are very likely to be lent for these types of ETFs.
Had anyone looked into shorting the inverse 3x leveraged funds in the same percentage?

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by staythecourse » Thu Feb 07, 2019 7:24 pm

EfficientInvestor wrote:
Thu Feb 07, 2019 1:04 pm
If someone could point me in the direction of some daily data for either intermediate or long term treasuries, I would be happy to run the calcs and post results. Unfortunately, the best I can find at this point is VUSTX and it only goes back to 1987. It would be ideal to get data going back to at least 1970 to see performance during the rising interest rate period that occurred until 1984ish. ^GSPC goes back to 1950, so I have the necessary stock data.
How about this data from Dr. Damadran presented earlier by another poster in this thread? http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

The link was posted earlier in this thread. If we could see the results from the suggested 40/60 split suggested here in 20 year rolling returns from 1950 to current and how the dispersion of those possible returns. Using sp500 we know as the time period increases the dispersion of returns decrease. Just curious what would happen with this approach.

I think a lot of us see some real value in the logic (who knows what will happen in real life). I just don't like the time periods being chosen to analyze the results (a period where sp500 and LTT did very well which is what happened from 1987 to current. I would rather see some rolling returns to see different outcomes and the dispersion in those returns, i.e. how clustered or far apart the returns are.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by random_person » Thu Feb 07, 2019 7:31 pm

unclescrooge wrote:
Thu Feb 07, 2019 6:17 pm
Had anyone looked into shorting the inverse 3x leveraged funds in the same percentage?
The first thing to note is that there is a cost to borrow the ETFs, but Interactive Brokers posts the daily prices online so you can see how much it costs (no historical data that I'm aware of).

Here is the link:

https://ibkr.info/article/2024

Not all securities are available to borrow at all times, which would be a problem for a long term investor.

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Oicuryy » Thu Feb 07, 2019 8:49 pm

FRED has monthly data back to 1953 for the 20-Year Treasury Constant Maturity Rate.
https://fred.stlouisfed.org/series/GS20

Their daily data only goes back to 1993.
https://fred.stlouisfed.org/series/DGS20

Morningstar has a procedure to approximate price and return data from constant maturity rates.
https://admainnew.morningstar.com/direc ... dology.pdf

If daily price data for the Dow Jones Industrial Average is good enough to represent stocks, you can get it here.
https://us.spindices.com/idsexport/file ... nload=true

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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by nisiprius » Thu Feb 07, 2019 9:56 pm

Hedgefundie, what brokerage did you finally choose for holding and transacting these ETFs?
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE » Thu Feb 07, 2019 10:36 pm

nisiprius wrote:
Thu Feb 07, 2019 9:56 pm
Hedgefundie, what brokerage did you finally choose for holding and transacting these ETFs?
M1 Finance. Free trades, one-button rebalancing, great customer service so far (moving my account over from Vanguard).

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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by samsdad » Fri Feb 08, 2019 7:48 am

staythecourse wrote:
Thu Feb 07, 2019 6:10 pm
hdas wrote:
Thu Feb 07, 2019 4:29 pm
Last thing, we are waiting on the 1960-1980 data to see :twisted:
What I really want to see is this analysis done on the data set from 1950-1970. That is more representative of what LIKELY will happen with interest rates going forward, i.e. starting low and slowly going up each and every year. Does ANYONE have the data for this period of time?

I love this concept, but just don't trust a data set where we know in RETROSPECT sp500 and LTT shot the lights out. Don't know where I read it, but think it was Dr. Bernstein in "TIAA" where he said the best diversifier to stocks from 1950-1970 was cash and not LTT. Makes sense as slowly increasing interest rates should have lower correlation with LTT. I am pretty sure I am not imagining that.

Either way I do love the idea. I still have not gotten an answer for stewardship issues if we have a 2008 scenario and the fund has HUGE outflows and gets shut down. Also, I love this idea if we were talking about it when the SP500 was NOT shooting out the lights.

Good luck.
Using Simba's backtesting spreadsheet, I get the following data for the unleveraged portfolio of 40/60 S&P500 and LTT for the time periods of 1950-1970, 1960-1980, and 1987-2018:

Code: Select all

Initial Investment				10000  10000   10000
Starting Year for backtest			1950	1960	1987
Ending Year for backtest			1970	1980	2018
# of Years backtesting				21	21	32
Offset 						79	89	116
Cycles Duration					30	30	30
					
MAR Benchmark Average	nominal			3.10%	5.40%	3.20%
					
WARNING: all metrics are derived from annual returns, therefore NOT taking in account intra-year events					
Time Period: 		varies			1950-70	'60-80	'87-18
Portfolio CAGR		nominal			6.11%	5.07%	8.86%
Portfolio CAGR		real			3.50%	-0.18%	6.10%
Portfolio Avg Return	nominal			6.30%	5.34%	9.21%
Portfolio Alpha		nominal			-4.46%	-2.70%	0.92%
					
Standard Deviation	nominal			6.62%	7.72%	8.90%
Stdev (Portfolio - MAR)	nominal			7.63%	8.34%	8.73%
Downside SD vs. MAR	nominal			3.03%	3.42%	1.37%
Upside SD vs. MAR	nominal			4.75%	3.20%	4.84%
Max. Drawdown		nominal			7.26%	12.69%	3.75%
Ulcer Index		nominal			1.62%	3.51%	0.98%
Maximum Withdrawal Rate	real			7.58%	5.59%	7.14%
Perpetual Withdrawal Rate real			3.90%	-0.21%	6.07%
					
Sharpe Ratio		nominal			0.42	-0.01	0.69
Sortino Ratio		nominal			1.06	-0.03	4.4
Ulcer Perf. Ratio 	nominal			1.98	-0.03	6.13
Portfolio Beta		nominal			1.22	1.2	0.86
					
US Mkt. Correlation	nominal			0.82	0.83	0.64
Int'l Mkt. Correlation	nominal			N/A	N/A	0.25
					
Total - Rebalanced	nominal			34727	28276	151495
Total - Unbalanced	nominal			57156	29450	137878
Total - Rebalanced	real			20592	9633	66456

Some thoughts:

1. I adjusted the time period from 1986 to 1987 in the '87-18 portfolio in column 3, because the TMF fund data provided by EfficientInvestor starts at June 1986 according to PV. To equalize everything, I started it in January 1987 here in Simba's spreadsheet. The CAGR of 8.86 here matches with a 40/60 VFINX (500) and VUSTX (LTT) portfolio in PV for that time period. https://www.portfoliovisualizer.com/bac ... tion2_1=60

2. Comparing the CAGRs of the 40/60 portfolio over those three time periods vs. 100% sp500 and 100% LTT:

Code: Select all

		'50-70	'60-80	'87-18
40/60		6.11%	5.07%	8.86%
100% S&P 500 	12.76%	7.70%	9.87%	
100% LTT	0.98%	2.69%	7.26%
3. Now the question becomes can we take the '50-70 unleveraged data and '60-80 unleveraged data above, and somehow match it to the leveraged data we have from '87-18 via some sort of ratio, even if somewhat imprecise? For example, we know that an unleveraged 40/60 portfolio from '87-18 returned 8.86% CAGR. Had it been leveraged, it would have returned 23.52%. So, can we say that during this time, the leveraged portfolio returned 2.65 times as much? (23.52/8.86=2.65)

If so, can we then extrapolate (or some other word, it's early in the morning), that 2.65 multiplier for the other time periods? So, for the '50-70 data, the unleveraged CAGR of 6.11% would have been 16.22% had it been leveraged? Or the '60-80 unleveraged CAGR of 5.07%--might it have been 13.46% had it been leveraged? Probably not. But someone should be able to come up with an estimate that takes into account such things as the difference in standard deviation, etc. in the data above.

Note that older data for LTT is given only in annual terms, and PV apparently requires at a minimum, monthly returns to come up with a benchmark it'll recognize.

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