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

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

Post by HomerJ » Sat Feb 09, 2019 11:29 am

staythecourse wrote:
Sat Feb 09, 2019 10:01 am
No one worth their salt is going to agree on a plan that has one time period analyzed where both the 2 assets did extremely well and just go, "See there you go". No different then every person who goes in the late 1990's, "See just invest in anything that has .com in it and you will be a millionaire".
This.
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staythecourse
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by staythecourse » Sat Feb 09, 2019 11:35 am

HomerJ wrote:
Sat Feb 09, 2019 11:25 am
HEDGEFUNDIE wrote:
Sat Feb 09, 2019 2:05 am
HomerJ wrote:
Fri Feb 08, 2019 11:02 am
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.
Again, you are only looking at a period of time where long-term bonds were basically in a bull market 90% of the time with falling interest rates.

You've seen that UPRO can lose a ton of money and take 17 years to recover. And you expect the long-term treasury returns to make up for that. But I doubt they will make up for any UPRO losses as STRONGLY starting from low interest rates like today.

I mean, your strategy may work, but it is very unlikely to mimic the past 30 years. Your backtest was dependent on conditions that do not exist today.

Again, today's conditions aren't bad. The strategy could work. But it will NOT work in the same way. Your back-test has very little predictive power about what kind of returns you will get going forward.
Another example for you. August 2000 to April 2010, the “lost decade” for stocks that included two market crashes.

0% total return for the S&P 500.

My strategy would have returned 10.7% CAGR over the same time period.

And before you ask, 30 year Treasuries went from 5.7% to 4.7% during this period, hardly a “bond bull market”.

This is what I mean when I say that this strategy has very little to do with returns, and everything to do with correlations.
Umm.. 5.7% dividend and with dropping interest rates, LT bonds returned 7.5% over those 10 years. That is a HUGE part of your 10.7% return over those 10 years.

I'm not saying your strategy won't work... I'm saying the RETURN of 23% a year is unlikely to repeat. You may still beat the market, you may still become quite rich... But I wouldn't count on $100k turning into $10 million.

The conditions aren't exactly the same.
I would agree with this, BUT... even if the returns were ZERO I think that would be a big success. Think about it... You are starting at really high valuations (around 30) in late 90's before the 2000's. Then a flat decade. Mix in one low magnitude but long bear market in early 2000's (2-3 years) and the single biggest disaster of a year on record in (5 sigma event) in 2008. IF one came out of this period with this investment plan with no return I would say it is still a win.

In the end, I do agree no plan in life ever ends up as good as you hope. But if that 100k ends up at 5 million in 20 years that would be amazing. It is a small portion of his portfolio, takes no effort or predictive ability, and no market timing.

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 hohum » Sat Feb 09, 2019 11:38 am

This rather brilliant strategy has a small but non-zero chance of a total wipeout.

The correct way to deal with this risk is:

1. acknowledge it
2. size the position appropriately
3. periodically take some of the profits off the table

HEDGEFUNDIE is currently doing #1 and #2, and is thinking about #3 (vineviz mentioned this earlier in the thread). So he's in good shape.

5000 years of backtests would not make the risk go away. And even if we found it did go to zero in 1964, what would that prove? In the long run, this strategy might go to zero, but "in the long run we are all dead" (Keynes).

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

Post by HomerJ » Sat Feb 09, 2019 11:39 am

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 10:38 am
Why do we do backtests? To use the past to guide the future. If the past has nothing to do with the future, why would we do the backtest?
EVERY SINGLE DETAILED INVESTMENT STRATEGY that failed..... at one point, backtested well.

That doesn't mean your strategy is doomed to failure, but backtesting alone has never been enough.

Yes, even the Bogleheads use the past to guide the future but only in the most general sense. We expect stock market to give us a positive return, over the long-run. We expect bonds (especially U.S. government bonds) to be less volatile and hold their value.

That's it. No detailed back-test finding the best curve. Just very general expectations that allow us to "buy and hold" and "stay the course", and mitigate risk as we get closer to retirement, "age in bonds".

YOUR strategy at least follows these general guidelines, mixing stocks, and long-term treasuries. It may work.

I'm not sure 3x leveraged funds have ever been tested in the real world during a huge crash. I'll guess you'll find out if reality matches theory.

Just don't fool yourself that a great looking backtest means you can't lose.

Every single detailed investment strategy in the past.... that failed... at one point, backtested very well.. That's WHY it was picked as an investment strategy. And then going forward, the strategy failed because...

VARIABLES in the real world changed, and the future didn't exactly match the past.
Last edited by HomerJ on Sat Feb 09, 2019 11:42 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HomerJ » Sat Feb 09, 2019 11:41 am

hohum wrote:
Sat Feb 09, 2019 11:38 am
This rather brilliant strategy has a small but non-zero chance of a total wipeout.

The correct way to deal with this risk is:

1. acknowledge it
2. size the position appropriately
3. periodically take some of the profits off the table

HEDGEFUNDIE is currently doing #1 and #2, and is thinking about #3 (vineviz mentioned this earlier in the thread). So he's in good shape.

5000 years of backtests would not make the risk go away. And even if we found it did go to zero in 1964, what would that prove? In the long run, this strategy might go to zero, but "in the long run we are all dead" (Keynes).
Good post. He's doing #1 somewhat... because he's also doing #2... Only investing 15% is smart.

But he's defending the strategy very strongly here, which makes me think he doesn't believe in #1, he doesn't recognize the risk completely.

I'm worried 5-10 years in, it's going to be doing well, and he's going to increase his allocation to it.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by HEDGEFUNDIE » Sat Feb 09, 2019 11:56 am

GrowthSeeker wrote:
Sat Feb 09, 2019 10:58 am
Gedanken experiment:
HEDGEFUNDIE wrote:
Sat Feb 09, 2019 10:15 am
Let’s flip the situation. If the Fed announced tomorrow that they were bringing back callable bonds, would anyone rely on my 1980s-today backtest? Of course not, and they shouldn’t.
Theoretically, if the Fed announced tomorrow that they were bringing back callable bonds, how would the markets respond, and more specifically, how do you think the strategy being discussed would respond?
If the answer is that it would hurt the strategy, what are the odds one could get out quickly enough?
It would depend on the details, but in general, if the Fed brought back callable bonds I would expect correlations between stocks and long Treasuries to increase, making the strategy untenable to hold into a downturn, and therefore untenable in general.

I don’t think there is any chance that the Fed would turn existing non-callable Treasuries into callable ones. That is the equivalent of defaulting on the debt. So I think you would have plenty of time to “get out” of the strategy.

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 12:15 pm

HomerJ wrote:
Sat Feb 09, 2019 11:41 am
hohum wrote:
Sat Feb 09, 2019 11:38 am
This rather brilliant strategy has a small but non-zero chance of a total wipeout.

The correct way to deal with this risk is:

1. acknowledge it
2. size the position appropriately
3. periodically take some of the profits off the table

HEDGEFUNDIE is currently doing #1 and #2, and is thinking about #3 (vineviz mentioned this earlier in the thread). So he's in good shape.

5000 years of backtests would not make the risk go away. And even if we found it did go to zero in 1964, what would that prove? In the long run, this strategy might go to zero, but "in the long run we are all dead" (Keynes).
Good post. He's doing #1 somewhat... because he's also doing #2... Only investing 15% is smart.

But he's defending the strategy very strongly here, which makes me think he doesn't believe in #1, he doesn't recognize the risk completely.

I'm worried 5-10 years in, it's going to be doing well, and he's going to increase his allocation to it.
If someone were to present a solid logical argument to describe a risk to this strategy that I have not considered, I would be happy to acknowledge it, and even list it in the original post to warn others.

So far we have:

1. Correlations between stocks and long Treasuries increase, especially during downturns. Yes, if this were to happen, the strategy would be over. But what would cause this to happen? And how likely is that cause?

2. The dollar losing its status as the world’s reserve currency. This one’s related to #1. I already acknowledged this could happen, but in my opinion not likely during my timeframe of the next 20 years.

3. Rising interest rates / inflation. This one’s just a bad argument. Stocks don’t automatically suffer as a result of rising interest rates and over 20 years bonds don’t either.

3a. Spiking interest rates / inflation. This would kill TMF but what about UPRO? Unclear. And what would cause interest rates to spike? How likely is it?

4. The ETFs themselves breaking down in times of market stress. Possible, but EfficientInvestor has already posted examples of 3x ETFs going to almost zero and surviving.

5. The Second Great Depression. Seriously?

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

Post by BrooklynInvest » Sat Feb 09, 2019 12:41 pm

Sorry, may have missed it -

Is the cost of levering at 3x only 1%? How does that work? And can I borrow cash at that rate 'cause I'd like to pay off my mortgage...

My main question with risk parity investing in general is that we're balancing past risk, no? Any strategy that emphasized bonds would have done well over a 30 year period I'd think. So how do you compensate for a non-repeatable bond bull?

Best of luck OP! Glad you're limiting this to 15% of your portfolio.

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 12:49 pm

BrooklynInvest wrote:
Sat Feb 09, 2019 12:41 pm
Is the cost of levering at 3x only 1%? How does that work? And can I borrow cash at that rate 'cause I'd like to pay off my mortgage...
The cost of borrowing is partly accounted for in the 1% ER and partly accounted for in the performance of the fund itself (i.e. the daily tracking behavior could be slightly less than 3x, reflecting that cost).

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

Post by staythecourse » Sat Feb 09, 2019 12:55 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 12:15 pm
HomerJ wrote:
Sat Feb 09, 2019 11:41 am
hohum wrote:
Sat Feb 09, 2019 11:38 am
This rather brilliant strategy has a small but non-zero chance of a total wipeout.

The correct way to deal with this risk is:

1. acknowledge it
2. size the position appropriately
3. periodically take some of the profits off the table

HEDGEFUNDIE is currently doing #1 and #2, and is thinking about #3 (vineviz mentioned this earlier in the thread). So he's in good shape.

5000 years of backtests would not make the risk go away. And even if we found it did go to zero in 1964, what would that prove? In the long run, this strategy might go to zero, but "in the long run we are all dead" (Keynes).
Good post. He's doing #1 somewhat... because he's also doing #2... Only investing 15% is smart.

But he's defending the strategy very strongly here, which makes me think he doesn't believe in #1, he doesn't recognize the risk completely.

I'm worried 5-10 years in, it's going to be doing well, and he's going to increase his allocation to it.
If someone were to present a solid logical argument to describe a risk to this strategy that I have not considered, I would be happy to acknowledge it, and even list it in the original post to warn others.

So far we have:

1. Correlations between stocks and long Treasuries increase, especially during downturns. Yes, if this were to happen, the strategy would be over. But what would cause this to happen? And how likely is that cause?

2. The dollar losing its status as the world’s reserve currency. This one’s related to #1. I already acknowledged this could happen, but in my opinion not likely during my timeframe of the next 20 years.

3. Rising interest rates / inflation. This one’s just a bad argument. Stocks don’t automatically suffer as a result of rising interest rates and over 20 years bonds don’t either.

3a. Spiking interest rates / inflation. This would kill TMF but what about UPRO? Unclear. And what would cause interest rates to spike? How likely is it?

4. The ETFs themselves breaking down in times of market stress. Possible, but EfficientInvestor has already posted examples of 3x ETFs going to almost zero and surviving.

5. The Second Great Depression. Seriously?
Reasonable list. My biggest that still has not been addressed by anyone is about stewardship of the ETF firm. What if we have a 2008 happen again and the liklihood MANY of these funds will close down. What happens? Does your existing money left get distributed back as cash? In that case you would have to just be in the normal sp500 until it started to take off again. Then the same company and others would open another 3x leveraged fund. The issue is that IF that happened like that one would have "missed" some of the best results of the early gains just being in unleveraged sp500. Not the worst thing just trying to figure out what the plan would be? Guess you wait until it happens then stick the leftover money in sp500 (unleveraged) and then shift to ?2x LTT and shift the asset mix to 60/40 (s/b)? Guess you would just do the best risk parity of the funds (un and leveraged funds) available at the time?

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 siamond » Sat Feb 09, 2019 12:59 pm

Let's bring a few more data points to the table. I used the 1973+ data I gathered (Barclays LT treasuries and S&P 500 total-return indices) to compute monthly returns, and then rolling correlations on those returns. The chart below shows 12-months rolling periods (left axis). In addition, I computed the growth of a 50/50 Asset Allocation, from which I derived drawdowns (right axis). Note that those are the regular indices, not the 3x vehicles (I think we need to work a bit more on those 3x models, notably for bonds, so let's put that aside for a minute).

Image

It is always a little tricky to interpret those graphs because we're all guilty of confirmation bias, but let's give it a try. If we focus on the 3 major crises, stocks would have dropped roughy 40% in all cases. The use of LTTs did help to mitigate the problem, with somewhat uneven results. Interestingly, although correlation trajectories are clearly inconsistent between the 3 crises, the practical outcome on drawdowns remained fairly satisfying (drawdowns limited to 20%). Again, those are regular indices, not 3x vehicles for which things would be exacerbated.

What personally personally strikes me the most in this chart is the risk of being "fooled by randomness" (with all credits to Nassim Taleb, whose eponymous book is a must read for all investors considering somewhat novel or exotic strategies). Look at the general pattern, it seems to be essentially made of random swings. The probability that those swings helped in those few major crises just out of luck (or partly so) cannot be neglected. And fact is, if we run the correlation math over the entire time period, it is equal to... 0.08! Null correlation is very different from negative correlation.

This observation (if valid) doesn't invalidate the proposed 3x strategy. But it should make clear that in the future, one cannot bet on the fact that LT bonds will save the day when stocks tank, and one should be ready for potentially very dramatic drawdowns. If this is followed by a recovery, then this might be bearable, but what would be the consequences on the real-life 3x funds, I don't know...
Last edited by siamond on Sat Feb 09, 2019 1:01 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 » Sat Feb 09, 2019 1:00 pm

staythecourse wrote:
Sat Feb 09, 2019 12:55 pm
What if we have a 2008 happen again and the liklihood MANY of these funds will close down.
If 2008 happened again, UPRO would get killed but TMF would skyrocket. Would TMF close down because it was going up too fast? :confused

Now if both funds get killed at the same time, the strategy would be done, whether or not the ETF firm "stewardship" survives. But I acknowledged this already.

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

Post by Jags4186 » Sat Feb 09, 2019 1:04 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 1:00 pm
staythecourse wrote:
Sat Feb 09, 2019 12:55 pm
What if we have a 2008 happen again and the liklihood MANY of these funds will close down.
If 2008 happened again, UPRO would get killed but TMF would skyrocket. Would TMF close down because it was going up too fast? :confused

Now if both funds get killed at the same time, the strategy would be done, whether or not the ETF firm "stewardship" survives. But I acknowledged this already.
If UPRO shut down you could always move to SSO which did survive 2008-2009 fine until another 3x leveraged ETF started up.

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

Post by HomerJ » Sat Feb 09, 2019 1:07 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 12:15 pm
If someone were to present a solid logical argument to describe a risk to this strategy that I have not considered, I would be happy to acknowledge it, and even list it in the original post to warn others.
There's no free lunch.

There's no easy low risk way to make 23% a year for 20-30 years.

That's all I got.

You may be right... This strategy may make you a very rich man. Good luck to you. Sincerely.

I just doubt it.
Last edited by HomerJ on Sat Feb 09, 2019 1:15 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 » Sat Feb 09, 2019 1:14 pm

HomerJ wrote:
Sat Feb 09, 2019 1:07 pm
HEDGEFUNDIE wrote:
Sat Feb 09, 2019 12:15 pm
If someone were to present a solid logical argument to describe a risk to this strategy that I have not considered, I would be happy to acknowledge it, and even list it in the original post to warn others.
There's no free lunch.

There's no easy low risk way to make 23% a year for 20-30 years.

That's all I got.

You may be right... This strategy may make you a very rich man. Good luck to you. Sincerely.

I just doubt it.
Homer, I agree with you that there is no free lunch. My strategy is not a free lunch.

The regular non-leveraged 3-fund portfolio offers moderate returns with moderate risk in every year.

This strategy offers high returns over most years, WITH a small chance in any given year of total collapse.

Therefore, I'd say the two strategies are equivalent in overall risk & return. No free lunch.

The argument we should be having now for my strategy is how small that risk of total collapse actually is. I think the risk is small enough over the next 20 years to bet $100k of real money. Others may come to their own conclusions.

Thank you for your well wishes.
Last edited by HEDGEFUNDIE on Sat Feb 09, 2019 1:23 pm, edited 4 times in total.

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

Post by HomerJ » Sat Feb 09, 2019 1:14 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 1:00 pm
staythecourse wrote:
Sat Feb 09, 2019 12:55 pm
What if we have a 2008 happen again and the liklihood MANY of these funds will close down.
If 2008 happened again, UPRO would get killed but TMF would skyrocket. Would TMF close down because it was going up too fast? :confused

Now if both funds get killed at the same time, the strategy would be done, whether or not the ETF firm "stewardship" survives. But I acknowledged this already.
2008 probably won't happen again. Backtests always show how to avoid the last crash. The next crash always seems to be different.
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Re: HEDGEFUNDIE's excellent adventure [3x leveraged ETF strategy]

Post by stlutz » Sat Feb 09, 2019 1:27 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 10:15 am
As vineviz mentions, consider that Treasuries issued in the 80s and earlier were callable. In other words, if interest rates declined, the Fed could just stop paying interest on the existing bond. So when interest rates did decline, the existing issued Treasuries did not increase in value much, as they would today.

https://www.treasurydirect.gov/indiv/re ... d_call.htm

That is a fundamental difference that would make this strategy behave differently. Interest rates decline during recessions. Stocks drop in these times, and outstanding Treasuries should increase in value. But callable Treasuries would not increase in value, which undercuts the correlations that underpin the strategy.
The US government issues all kinds of callable bonds today. So, this actually is a testable claim. When Treasury rates dropped rather rapidly in the final quarter of 2018, what happened to these callable bonds?

If I'm reading the claims in this thread correctly, the assertion is not just that callable bonds wouldn't do as well as Treasuries, but that the call feature would cause the sign to be reversed (as was the case with stock/T-bond correlations in the 60s/70s).

In Q3-2018, the prices of callable bonds of course went up, not down. To the extent any bonds got called, it did hurt the performance of those bonds relative to non-callable Treasuries.

A portfolio of callable bonds has issues with a broad range of rates. It's simply not the case that if rates went down .25% that all such bonds get called. For a bond to get called it has to be economically advantageous for the issuer to do so, which involves more factors than just the current interest rate.

Call provisions in bonds would hurt the strategy being advanced here. But the argument that calls were a primary cause for the correlation direction to have been reversed in prior decades is taking the argument way too far.

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

Post by michaeljc70 » Sat Feb 09, 2019 1:30 pm

Elysium wrote:
Thu Feb 07, 2019 10:17 am
EfficientInvestor wrote:
Thu Feb 07, 2019 9:34 am
Elysium wrote:
Thu Feb 07, 2019 9:05 am
Someone had to ask this question, so I will. If this strategy is so good as promised, why hasn't anyone else tried it to become multi-millionaires using it. Where are the professional money managers using such a strategy to beat the S&P 500?
I think the general public has not considered the use of this strategy with leveraged ETFs because anything you read about them says not to hold them long term. After you learn that UPRO would have had a drawdown of 95% during 2008, you don't want to come anywhere near an investment like that. However, if you consider the use of the leveraged ETFs as part of a diversified portfolio, the picture changes completely. By applying leverage to a diversified portfolio, you can achieve higher returns with less drawdown because you are taking advantage of the much more efficient use of capital. Consider the 2X backtest below starting in 2006 using S&P 500 and 7-10 year treasuries. Despite SSO having a -81.3% drawdown during the 2008 crash, the 2X 40/60 portfolio as a whole would have drastically outperformed the S&P 500 over the time period with less drawdown than an unleveraged 60/40 portfolio.

Jul 2006 - Jan 2019
2X 40/60 - CAGR = 11.8%, Max DD = -21.7%
40/60 - CAGR = 7.7%, Max DD = -26.8%
S&P 500 - CAGR = 8.3%, Max DD = -51.0%

https://www.portfoliovisualizer.com/bac ... tion4_2=40
That still doesn't address the question, anyone can do that on a diversified portfolio if it were that simple. It sounds like a simple strategy someone can openly post on the internet with a few backtests and implement with a few low costs leveraged ETFs, yet it promise to generate 10x more than unleveraged S&P 500.
There is no promise. As he said in the OP, this is risky.

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

Post by stlutz » Sat Feb 09, 2019 1:33 pm

On the question of 1982 being the key demarcation year between old Fed policy and new Fed policy (thus causing the correlation sign to flip to being negative): I looked a the correlation between LT Treasuries and the US Stock Market in Portfolio Visualizer from 1982 to 1999, and the correlation was a positive .33. More useful than international stocks but certainly not negative.

If one wants to pick a year when everything changed, 2000 is a better candidate. That is why correlations became reliably negative.

Saying that the long-term future can reliably be expected to be like just the last 18 years--isn't that a problematic view?

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

Post by SpaceCommander » Sat Feb 09, 2019 1:36 pm

It's easy to be a critic when someone tries something innovative.

If it works, the reply is either: 1. He took too much risk, or 2. He got lucky.
If it fails, the reply is: See. We told you so.

Either way, the critic is justified and the innovator can't win. :oops:
I honor my personality flaws, for without them I would have no personality at all.

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 1:39 pm

stlutz wrote:
Sat Feb 09, 2019 1:33 pm
On the question of 1982 being the key demarcation year between old Fed policy and new Fed policy (thus causing the correlation sign to flip to being negative): I looked a the correlation between LT Treasuries and the US Stock Market in Portfolio Visualizer from 1982 to 1999, and the correlation was a positive .33. More useful than international stocks but certainly not negative.

If one wants to pick a year when everything changed, 2000 is a better candidate. That is why correlations became reliably negative.

Saying that the long-term future can reliably be expected to be like just the last 18 years--isn't that a problematic view?
I should clarify that when I say this strategy rests upon correlations, it is correlations during periods of market stress.

This strategy works because when one asset crashes the other rises sharply, mitigating the overall portfolio impact. Meanwhile if you held only the asset that crashed, you would have a large drawdown to climb out of. It should be intuitive that this strategy works well in these cases.

During periods of market normalcy, slightly positive correlations should not hurt this strategy.

My original backtest was 1987-2018, which includes both the somewhat positive correlation period in the 90s and the somewhat negative correlation period in the 2000s. Mid-20s CAGR through both periods.

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

Post by jminv » Sat Feb 09, 2019 1:42 pm

GrowthSeeker wrote:
Sat Feb 09, 2019 10:58 am
Gedanken experiment:
HEDGEFUNDIE wrote:
Sat Feb 09, 2019 10:15 am
Let’s flip the situation. If the Fed announced tomorrow that they were bringing back callable bonds, would anyone rely on my 1980s-today backtest? Of course not, and they shouldn’t.
Theoretically, if the Fed announced tomorrow that they were bringing back callable bonds, how would the markets respond, and more specifically, how do you think the strategy being discussed would respond?
If the answer is that it would hurt the strategy, what are the odds one could get out quickly enough?
Demand for treasuries would decrease and the effective governmental borrowing cost would increase? This would probably not be what the government would want given the amount of debt they have to sell. I would be more worried about the Fed eventually deciding to inflate away a portion of the outstanding debt.

I've done something like the OP is suggesting before with a small portion of my portfolio. Risk parity without this sort of leverage. It's an interesting thread to follow. What makes it more interesting to me, however, is as a sort of counter from the liquid markets side to the small leveraged illiquid real estate crowd here that relies on sunny estimates of future returns. It is possible to leverage a stock portfolio without a margin calls (although possible leveraged etf wipeout) and to build a lot of wealth. It's also possible to lose a lot of money doing it when the present doesn't correlate with the past.

As a fun exercise, use portfolio visualizer to see what happens if you were invested in a 3x leveraged US Reit. The data for the index is out there and the bubble is very apparent. I haven't seen this in the thread, so thought I would mention it. If you put it in the optimization mix and don't constrain weights, the reits will not be part of the portfolio.
Last edited by jminv on Sat Feb 09, 2019 1:44 pm, edited 1 time in total.

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

Post by staythecourse » Sat Feb 09, 2019 1:42 pm

SpaceCommander wrote:
Sat Feb 09, 2019 1:36 pm
It's easy to be a critic when someone tries something innovative.

If it works, the reply is either: 1. He took too much risk, or 2. He got lucky.
If it fails, the reply is: See. We told you so.

Either way, the critic is justified and the innovator can't win. :oops:
Who thinks that? I don't think one person on here has been less then impressed at the innovate idea even the ones who would never think about doing it. I think everyone is bringing up points that should HELP the OP think about it from different angles that might make a difference or not.

I'm definitely impressed with the concept and the execution and its ability to be repeated by others. I am in serious consideration of dropping the same amount of money in it as well, but doesn't stop me from asking questions.

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 Time2Quit » Sat Feb 09, 2019 1:48 pm

I get a kick out of people saying we need to backtest to understand how this performs, but in the same breath say no one can predict the future :annoyed

Hedgefundie has the stones to do this and is sharing the strategy but there seems too many people over-analyzing this. Hedgefundie has proven this strategy performs in the past and has worked just like the S&P500/Total market has worked in he past.

What the futures brings no one knows but you can’t win if you don’t play. In the big picture, what is Hedgefundie out if this strategy goes to zero? IMO this has a much larger reward compared to the risk involved. For starters you are not betting on a single stock.

If Hedgefundie were betting his whole portfolio that would be a different story. Hedgefundie is young and has time to recover if things go south.

I bet on a little stock NEOG in the 90s with10% of my holdings back then and it did really well for me. I just did not have the stones to hang on to it and got rid as soon as it tripled. If I back test it today, I would have been on the same trajectory as what is being attempted here 20%+ CAGR. I did not realize that till I checked it on PV recently.

Times may change and this strategy may not get to $10M in the allotted time, but this won’t go to zero overnight either. If it does go to zero we all have bigger problems. If I were still in accumulation mode I would not hesitate to join this strategy.

Thanks again for sharing your strategy! Looking forward to the quarterly updates.

May the power of compounding be with you! :moneybag
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

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

Post by bgf » Sat Feb 09, 2019 1:57 pm

OP, if this were to fail, is it more likely to fail:
1) with consistently weak returns, or
2)a drastically bad return over a short period.

same with success, is it more likely to:
1) consistently outperform, or
2) have a few incredibly big years that account for most of the outperformance.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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

Post by siamond » Sat Feb 09, 2019 2:04 pm

stlutz wrote:
Sat Feb 09, 2019 1:33 pm
On the question of 1982 being the key demarcation year between old Fed policy and new Fed policy (thus causing the correlation sign to flip to being negative): I looked a the correlation between LT Treasuries and the US Stock Market in Portfolio Visualizer from 1982 to 1999, and the correlation was a positive .33. More useful than international stocks but certainly not negative.

If one wants to pick a year when everything changed, 2000 is a better candidate. That is why correlations became reliably negative.

Saying that the long-term future can reliably be expected to be like just the last 18 years--isn't that a problematic view?
Yes, the data I assembled and posted earlier in this thread shows the same thing.

It is interesting to observe that nobody looking at a similar chart in the late 90s would have thought of LT bonds as a solid diversifier. Then things changed for a couple of decades. And guess what, they are going to change again, in a different and unpredictable way. I have to insist, relying on the negative correlation to keep showing up is wishful thinking. This doesn't invalidate the proposed strategy, mind you, it just makes it more risky than currently articulated in the OP.

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

Post by staythecourse » Sat Feb 09, 2019 2:55 pm

Time2Quit wrote:
Sat Feb 09, 2019 1:48 pm
I get a kick out of people saying we need to backtest to understand how this performs, but in the same breath say no one can predict the future :annoyed
So you think wanting to see how the portfolio would have done outside of the time period presented where BOTH of the asset classes we know shot the lights out is unreasonable? So you would have been one of the folks in the late 1990's to be all in on tech and large cap growth as the current numbers at that time clearly show it has to outperform because it has in in that data set?

When you have only 2 asset classes (leveraged or not) it is VERY reasonable and rather intelligent to ask what if they didn't do well what would happen. Luckily, that shouldnt be hard since the 2 asset classes have data far back... Sp500 since 1960 or so and LTT much further back.

Sorry you don't see the obvious.

Good luck.

p.s. That is not a knock against the idea. I hope for the best as well and likely will be throwing the same amount of money in it, but wouldn't be doing it until I had more data under DIFFERENT time points.
"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 siamond » Sat Feb 09, 2019 3:29 pm

Time2Quit wrote:
Sat Feb 09, 2019 1:48 pm
I get a kick out of people saying we need to backtest to understand how this performs, but in the same breath say no one can predict the future :annoyed
Let me explain a key point about backtesting. It is pretty good at disproving something. Which is a very useful process to follow when exploring novel ideas. If the new concept passes such test, then we still don't know what the future will be made of, but at least we have a reasonable hypothesis to follow. If the new concept falls apart while backtesting, then better forget about it.

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

Post by EfficientInvestor » Sat Feb 09, 2019 4:00 pm

siamond wrote:
Sat Feb 09, 2019 3:29 pm
Time2Quit wrote:
Sat Feb 09, 2019 1:48 pm
I get a kick out of people saying we need to backtest to understand how this performs, but in the same breath say no one can predict the future :annoyed
Let me explain a key point about backtesting. It is pretty good at disproving something. Which is a very useful process to follow when exploring novel ideas. If the new concept passes such test, then we still don't know what the future will be made of, but at least we have a reasonable hypothesis to follow. If the new concept falls apart while backtesting, then better forget about it.
Well said!

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

Post by whodidntante » Sat Feb 09, 2019 4:17 pm

SpaceCommander wrote:
Sat Feb 09, 2019 1:36 pm
If it fails, the reply is: See. We told you so.

Either way, the critic is justified and the innovator can't win. :oops:
That's one reason I like the market timer thread. He received a lot of criticism and some of it was flippant, and he never responded in kind. It takes conviction to do something different and stick with it. The high fives may not come even if your strategy works.

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

Post by drk » Sat Feb 09, 2019 4:21 pm

SpaceCommander wrote:
Sat Feb 09, 2019 1:36 pm
It's easy to be a critic when someone tries something innovative.

If it works, the reply is either: 1. He took too much risk, or 2. He got lucky.
If it fails, the reply is: See. We told you so.

Either way, the critic is justified and the innovator can't win. :oops:
Eh? If it works, doesn’t the “innovator” win? Who cares what a bunch of schmoes on a message board think?

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

Post by samsdad » Sat Feb 09, 2019 4:43 pm

I’ve edited this post to follow EfficientInvestor’s lead regarding the simulated data issue:

UPDATE (2/20/19) - The data that had previously been provided in this post was based on developing a best fit to the data of actual leveraged ETFs since their inception. Since inception of 3X ETFs in 2009, borrowing rates have been low. Therefore, this data did not take into account higher borrowing rates that occurred prior to 2009. Due to this, I have removed the data I had previously provided.
Last edited by samsdad on Wed Feb 20, 2019 11:57 am, edited 6 times in total.

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

Post by Robert T » Sat Feb 09, 2019 5:03 pm

.
Rather than simply looking at correlations between (leveraged) S&P500 and 20+ year treasuries since 1987 (time period used in OP) and assuming this will be reflective of market conditions going forward it may be useful to take a structural view of correlations (i.e. what they would likely be under different market conditions).

Dalio’s risk parity approach covers 4 types of market conditions

Rising growth = stocks do well (unexpected earnings growth)
Falling growth = stocks do badly (unexpected earnings decline)
Rising inflation = long-term nominal bonds do badly (unexpected inflation erodes the real value of bond coupon payments, and increases the risk of rising interest rates causing bond prices to fall)
Falling inflation = long-term nominal bonds do well (unexpected disinflation increases the real value of bond coupon payments, and reduces the risk of rising interest rates causing bond prices to rise)

Putting these together, and the implications for correlations:

Inflationary growth = stocks tend to do well, bonds tend to do badly – negative stock-bond correlation
Deflationary recession = stocks tend to do badly, bonds tend to do well – negative stock-bond correlation
Deflationary growth = stocks tend to do well, bonds tend to do well – positive stock-bond correlation when both do well
Inflationary recession = stocks tend to do badly, bonds tend do to badly – positive stock-bond correlation when both do badly

So the question is which market conditions will we see in the future (lifespans of investors). An inflationary recession will likely be bad for the strategy in the OP (3x leveraged stocks and bonds doing badly at the same time). What is an example of this? Early 1970s (outside the sample used in the OP back-test). Will this type of market condition exist in the near future? No-one knows. Dailo’s risk parity approach tries to protect against all types of market condition, including inflationary recessions (e.g. his inclusion of inflation-protection assets such as commodities and inflation-linked bonds).

Robert
.

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

Post by SVT » Sat Feb 09, 2019 5:15 pm

Hmm, I just might go for this as well. Very similar stats to you HEDGEFUNDIE. I'm 33, with $80k in Roth IRA. If I invested my Roth IRA in this strategy, it'd only be 10% of my investable assets. So we're roughly the same there as well. I've been looking at taking some more risk. This might fit the bill.

An even $100k would be nice but it seems like it's best to do this in Roth IRA than a taxable account or Rollover IRA. I wouldn't want to do this in a Rollover IRA right? I'll have to look into the M1 Finance thing. What are the pros and cons of using them for this?

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

Post by staythecourse » Sat Feb 09, 2019 5:21 pm

samsdad wrote:
Sat Feb 09, 2019 4:43 pm
I took the daily data set from Yahoo Finance for ^GSPC all the way back to January, 1950 through the end of last December. I then multiplied each day by 3. I also did not do the weighting thing that EfficientInvestor did, and did not take into account ER. That said, it also doesn't include dividends. Here's the results of GSPC3X 50-18 (red) compared to UPRO1985 (EfficientInvestor's data set) from January 1985 through the end of last December:

Image

Those are close enough for me without beating my head against the wall trying to account for ER, weighting, and dividends. We'll go back to the 1950s in a sec.

Next, we have the LTT problem. Everything I found that goes back to the 50s is in yearly returns; and to compound the problem, PV needs at least monthly returns. What to do? I settled on making an artificial monthly return table by going through the first 11 months of each year with a 0% return, then taking the last month of each year and putting that year's return in there. My source was Longinvest's bond simulator for LTT returns. After getting each year's 12th month data, I then multiplying each year by 3, and, again, not accounting for ER or dividends. DISCLAIMER: These are yearly returns and are going to be trashed as beyond worse than nothing, etc. I'm fine with that. You remember those pictures of Pluto from about 20 years ago? Nice and choppy at best? Did Pluto still exist? Onwards.

Taking my choppy, yearly data, and comparing it to the simulated TMF data back to 1985 from EfficientInvestor, you see this in PV:

Image

The recent endpoint somewhat misleading due to the Frankenstein nature of the yearly data I call LTT 3X 50-18 (red). You can see that they follow each other closely. Again, EfficientInvestor's data set starting in June 1986 matches up, despite the off-roading my data set does, in many instances through around 2016. Give it more time and it'll match up again (and it would obviously match up if I used recent daily data).

SOOOOO,

What does the data, however imperfect, look like in a 40/60 mix from say, 1950-1970? Here you go:

Image

And here's what 1960-1980 looked like with this imperfect data:

Image

Some thoughts:

THIS IS IMPERFECT DATA. Now that I've noted that again, I think it has a use. In an earlier post, I wondered:
Comparing the CAGRs of the [unleveraged] 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.
IF YOU CAN BELIEVE THE DATA: it looks like the 1950-70 CAGR of 13.35% for 40/60 3X portfolio is off by my guess of 16.22% above, but still 2.2 times the unleveraged 40/60, and still above the 12.76% CAGR of a 100% S&P500 portfolio of the time. And, the 1960-80 CAGR of 9.50% for a 40/60 3X portfolio is off by my guess of 13.46% above, but still 1.2 times the unleveraged 40/60, and still above the CAGR of 7.70% for a 100% S&P500 for this timeframe. IF YOU CAN BELIEVE THE DATA. <----- Did I say that enough?

What I'd like to note is that there was no doomsday scenario in any of the time periods.
Much appreciated. This is as close as we really need without exact numbers.

My takeaways:
In a slowly increasing interest rate environment (1950- 1970) and one with EXTREME inflation and, of course, subpar stock returns (late 1970's) and the flat 2000's starting at a high valuation point with a couple bear markets (one long, but shallow and the other short but REALLY DEEP) the concept did not falter much at all. No more then any other one ex post would have that had equities without really trying to torture the data.

Agree that I do not see a situation that the portfolio just blew up in the investors face.

The times that were rough were pretty short term if one just stuck with the plan which is reassuring. The reason is the ones most likely to try this are the same folks who don't really need that initial investment AND are fine seeing their portfolio go up and down extreme amounts and not care.

Kudos to Hedgiefund for thinking of a very novel approach. Feels like the line from "Beautiful Mind" :D . I like it and will likely be doing the same with the same amount of money soon. If I lose the 90k-100k won't matter, but the chance it may do just 1/2 of what is promised 5 million in 20 years is a worthwhile bet. I'll add a note to the thread when I do so myself.

Like any financial plan it never turns out as well as you want and there will be something that happens that we haven't thought of, but on ex ante approach it is as good as any for anyone who has "play money" or use some random market timing or security selection approach to investing (active management). This is way more solid of an approach as it eliminates single company risk and still adheres to commonly accepted asset allocation principles (just on steroids) and passive investing (buy and hold).

My only lasting concern is if the funds will still exist when the market shudders like a 2008 event. Guessing some new risk parity combo will be needed (changing s/b % and moving to less leveraged, i.e. 2x or no leverage) until they restart.

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 staythecourse » Sat Feb 09, 2019 5:25 pm

SVT wrote:
Sat Feb 09, 2019 5:15 pm
Hmm, I just might go for this as well. Very similar stats to you HEDGEFUNDIE. I'm 33, with $80k in Roth IRA. If I invested my Roth IRA in this strategy, it'd only be 10% of my investable assets. So we're roughly the same there as well. I've been looking at taking some more risk. This might fit the bill.

An even $100k would be nice but it seems like it's best to do this in Roth IRA than a taxable account or Rollover IRA. I wouldn't want to do this in a Rollover IRA right? I'll have to look into the M1 Finance thing. What are the pros and cons of using them for this?
If I end up doing it I will be using M1 finance. What I love is to have an account OUTSIDE of all my other accounts. Almost simulating the Fidelity study where I basically forget it exists. I do quarterly taxes as I own my own medical practice so that will be my reminder to login and hit the rebalance button.

For me, this will be a very small part of my liquid net worth and in a small roth IRA. It is one I likely will not even touch in my lifetime and will end up giving to heirs so the time horizon is in the 40+ year range. This is the only small move I can think of that has a chance of making it BIG and doing it passively.

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 EfficientInvestor » Sat Feb 09, 2019 5:35 pm

Robert T wrote:
Sat Feb 09, 2019 5:03 pm
.
Rather than simply looking at correlations between (leveraged) S&P500 and 20+ year treasuries since 1987 (time period used in OP) and assuming this will be reflective of market conditions going forward it may be useful to take a structural view of correlations (i.e. what they would likely be under different market conditions).

Dalio’s risk parity approach covers 4 types of market conditions

Rising growth = stocks do well (unexpected earnings growth)
Falling growth = stocks do badly (unexpected earnings decline)
Rising inflation = long-term nominal bonds do badly (unexpected inflation erodes the real value of bond coupon payments, and increases the risk of rising interest rates causing bond prices to fall)
Falling inflation = long-term nominal bonds do well (unexpected disinflation increases the real value of bond coupon payments, and reduces the risk of rising interest rates causing bond prices to rise)

Putting these together, and the implications for correlations:

Inflationary growth = stocks tend to do well, bonds tend to do badly – negative stock-bond correlation
Deflationary recession = stocks tend to do badly, bonds tend to do well – negative stock-bond correlation
Deflationary growth = stocks tend to do well, bonds tend to do well – positive stock-bond correlation when both do well
Inflationary recession = stocks tend to do badly, bonds tend do to badly – positive stock-bond correlation when both do badly

So the question is which market conditions will we see in the future (lifespans of investors). An inflationary recession will likely be bad for the strategy in the OP (3x leveraged stocks and bonds doing badly at the same time). What is an example of this? Early 1970s (outside the sample used in the OP back-test). Will this type of market condition exist in the near future? No-one knows. Dailo’s risk parity approach tries to protect against all types of market condition, including inflationary recessions (e.g. his inclusion of inflation-protection assets such as commodities and inflation-linked bonds).

Robert
.
This is why I prefer the use of UGLD (3X gold) for 10% of my portfolio. It is also why I’ve considered the use of TYD (7-10 year treasuries) for a portion of the bond exposure. A portfolio of 35% UPRO, 55% TMF/TYD, and 10% UGLD may be more ideal from a risk parity perspective.

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

Post by samsdad » Sat Feb 09, 2019 5:37 pm

staythecourse-
Note that I edited my post above apparently while you were posting to reflect that the GSPC data was from monthly returns and not daily. PV balked at the daily data no matter how hard I tried. Still the results are close enough for me. I also edited some faulty math on my part at the end of the post.

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 5:50 pm

SVT wrote:
Sat Feb 09, 2019 5:15 pm
An even $100k would be nice but it seems like it's best to do this in Roth IRA than a taxable account or Rollover IRA. I wouldn't want to do this in a Rollover IRA right?
If the strategy works, this account will grow into a huge amount in 20-30 years, probably overshadowing every other asset you own. The only account type that protects the full amount from taxation is a Roth IRA.

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 5:54 pm

Let me just say thank you to everyone who wished me good luck, and welcome to the club for everyone who is jumping in. May we all be filthy rich in a few decades time :moneybag :moneybag :moneybag :beer

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

Post by SVT » Sat Feb 09, 2019 5:55 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 5:50 pm
SVT wrote:
Sat Feb 09, 2019 5:15 pm
An even $100k would be nice but it seems like it's best to do this in Roth IRA than a taxable account or Rollover IRA. I wouldn't want to do this in a Rollover IRA right?
If the strategy works, this account will grow into a huge amount in 20-30 years, probably overshadowing every other asset you own. The only account type that protects the full amount from taxation is a Roth IRA.
Yeah, that's what I was thinking. That'd be a lot of money to pay income taxes on from a Traditional IRA.

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

Post by staythecourse » Sat Feb 09, 2019 6:13 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 5:54 pm
Let me just say thank you to everyone who wished me good luck, and welcome to the club for everyone who is jumping in. May we all be filthy rich in a few decades time :moneybag :moneybag :moneybag :beer
Or poor...

Either way this seems to be the BEST idea that has been presented on this forum for one's PLAY money (if they have such a thing). If one is going to do active management this one checks out as good as any. I love that it is not a bet on a single stock, that it uses well known and liquid markets (Sp500 stocks and LT treasuries), it is easy to execute, and very little effort in maintenance.

Again it is noteworthy to all readers (especially less experienced investors) do NOT do this with any money you "need". My personal rec. is it should NOT exceed 10% of your total liquid net worth. The key to minimizing downside risk is limit the amount placed in the account. Also, do NOT add to the account.

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 HEDGEFUNDIE » Sat Feb 09, 2019 6:46 pm

bgf wrote:
Sat Feb 09, 2019 1:57 pm
OP, if this were to fail, is it more likely to fail:
1) with consistently weak returns, or
2)a drastically bad return over a short period.

same with success, is it more likely to:
1) consistently outperform, or
2) have a few incredibly big years that account for most of the outperformance.
I like this question.

Let us start by defining "success" and "failure".

I think failure for a strategy like this would be a drawdown so deep that it would not be able to recover within the timeframe I have laid out (20-30 years). We have seen that holding UPRO by itself during the past 20 years would have experienced a drawdown of 95% that took 17 years to recover from. I'd consider that a failure. I don't see that happening during a long period with consistently weak returns; a few years of "normal" 24% returns would get you back to even. So I stick to my prediction that if this strategy were to fail, it would fail at one moment in time, in spectacular fashion.

Success is easier to assess. Let's look at the annual returns from my original backtest of 1987-2018:

Image

Out of 32 calendar years of performance, ~12 years delivered close to the period average of +24%. The other years were either close to zero or way above +50%. So it appears from this limited sample that we'll have relatively fat tails. I consider this a good thing. It gives you hope that you will hit your targeted amount even if you are in year 18 and are still distant to your goal; alternatively it could allow you to end the game early if you hit a fortuitous sequence of returns.

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Time2Quit
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Time2Quit » Sat Feb 09, 2019 6:50 pm

Why not put 20 percent of your liquid portfolio in it and the remainder 80% into FI? Worst thing that can happen is you lose 20% percent.

If the market tanks and you lose the 20 percent (less loss than a 60/40). You can then roll over your 80% fixed income into your desired AA during the depressed market and ride it back up.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

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

Post by HEDGEFUNDIE » Sat Feb 09, 2019 7:04 pm

Time2Quit wrote:
Sat Feb 09, 2019 6:50 pm
Why not put 20 percent of your liquid portfolio in it and the remainder 80% into FI? Worst thing that can happen is you lose 20% percent.

If the market tanks and you lose the 20 percent (less loss than a 60/40). You can then roll over your 80% fixed income into your desired AA during the depressed market and ride it back up.
The risk here is that the 20% delivers only average performance (10% CAGR) and the 80% returns nothing. So effectively you have chosen a 20/80 AA in your 30s.

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

Post by staythecourse » Sat Feb 09, 2019 7:32 pm

HEDGEFUNDIE wrote:
Sat Feb 09, 2019 7:04 pm
Time2Quit wrote:
Sat Feb 09, 2019 6:50 pm
Why not put 20 percent of your liquid portfolio in it and the remainder 80% into FI? Worst thing that can happen is you lose 20% percent.

If the market tanks and you lose the 20 percent (less loss than a 60/40). You can then roll over your 80% fixed income into your desired AA during the depressed market and ride it back up.
The risk here is that the 20% delivers only average performance (10% CAGR) and the 80% returns nothing. So effectively you have chosen a 20/80 AA in your 30s.
Good thought process by Time2Quit and a reasonable answer by Hedgefundie. I agree with the latter. As I said above I would almost equate this thought process as the late Harry Browne's advice... Have x amount in your safe money and y amount in your play money and don't mix the two. So x amount is the amount you have in a standard boglehead approach (my advice is 90%) and IF you want to have a play account this would fit into that.

Mixing the x and y and basing the decision of one on the performance of the other is overly complicated. Best to avoid failures in any system is remove as many weak spots as possible and in investing it is human decision making.

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 Time2Quit » Sat Feb 09, 2019 7:44 pm

https://www.portfoliovisualizer.com/bac ... ation4_3=6

I was doing some back of the napkin calculations but this is what I was trying to say.

Portfolio 1 is a 60/40
Portfolio 2 is a 30 percent hedgefundie portfolio/70 percent BND
Portfolio 3 is 10 percent hedgefundie and balance is 50 VTSAX/BND.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

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

Post by samsdad » Sat Feb 09, 2019 7:50 pm

This may be the dumbest question on the thread, but I just wanted to confirm what I’ve read elsewhere on bogleheads:

Is it true that I can do an in-kind conversion of the traditional Ira (about $10k) I have in Fidelity that’s holding these ETF funds to an as-of-now-non-existent Roth also in Fidelity?

I have $5k in this project so far, and am strongly considering bumping it to $10k. Would it be better to wait to purchase the additional $5k worth before or after the conversion?

Thanks

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

Post by Time2Quit » Sat Feb 09, 2019 7:50 pm

What I failed to add is it is more of an increasing glide path for the equity side while your FI grows at whatever rate while the UPRO/TMF keep rebalancing quarterly. I know the PV link did not quite show that but it gives you an idea of preserving your FI.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

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

Post by EfficientInvestor » Sat Feb 09, 2019 8:14 pm

Time2Quit wrote:
Sat Feb 09, 2019 7:44 pm
https://www.portfoliovisualizer.com/bac ... ation4_3=6

I was doing some back of the napkin calculations but this is what I was trying to say.

Portfolio 1 is a 60/40
Portfolio 2 is a 30 percent hedgefundie portfolio/70 percent BND
Portfolio 3 is 10 percent hedgefundie and balance is 50 VTSAX/BND.
Time2Quit wrote:
Sat Feb 09, 2019 7:50 pm
What I failed to add is it is more of an increasing glide path for the equity side while your FI grows at whatever rate while the UPRO/TMF keep rebalancing quarterly. I know the PV link did not quite show that but it gives you an idea of preserving your FI.
This is very much along the lines of research I have been doing lately. The problem with typical asset allocation is that younger investors seek greater returns by being in a 80%+ stock portfolio. The problem with this is that it is horribly inefficient compared to the use of leverage on a diversified portfolio with a high Sharpe ratio (e.g. 40/60). This is actually the reason why I chose my handle name to be EfficientInvestor. IMO, every investor should have a “risk-free” bucket and an “at-risk” bucket. As you have shown in your backtest, the “risk-free” bucket can be a total bond market fund. It’s not completely risk-free, but I think we can all agree that it is relatively risk-free. Then, with any funds that you are putting at-risk, you should do so in the most efficient way possible. An 80/20 or 100/0 blend is not the most efficient way possible. Instead, you can use a 40/60 or 35/55/10 (10 being gold) portfolio, or something close to that for any funds that you are taking risk on and then apply the appropriate amount of leverage. To say it another way...Instead of using the old 100 minus age equals equity exposure, we should all use the more efficient AA and apply leverage according to time frame and risk tolerance. A more detailed narrative on how I arrived at these conclusions can be found at the link below.

https://theleveragedindexer.com/2018/10 ... h-of-levi/
Last edited by EfficientInvestor on Sat Feb 09, 2019 8:28 pm, edited 1 time in total.

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