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

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

Post by coingaroo »

P.S. Really fantastic academic article on essentially this strategy.

http://www.sr-sv.com/the-mighty-long-long-trade/

In particular, the authors acknowledge the underlying factors behind this strategy is still in place. However, he warns of fiscal risk, specifically helicopter money policies.

As an Australian who has successfully witnessed this policy during the GFC, I see it as a conceivable path towards inflation.

If you look at this strategy as taking both equity and duration risk - and accepting that both may post losses simultaneously - you’ll be fine.
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mikestorm
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by mikestorm »

MotoTrojan wrote: Wed Jul 17, 2019 9:37 pm Just discovered saved benchmarks in PV, whichs makes it a lot easier to compare conventional portfolios with market timing strategies.

Portfolio 1: 50/50 VEDTX (EDV) & TMF as combined bond component, rebalanced monthly for risk-parity w/ UPRO (20 day look-back)
Portfolio 2: TMF & UPRO rebalanced monthly for risk-parity
Portfolio 3: Original 40/60 UPRO/TMF quarterly rebalance
S&P500

The TMF/UPRO risk-parity is a significant boost in returns, but you can still get a significant leg-up on the original strategy with significantly less risk/drawdown via the risk-parity variant dosed with EDV. Shown here are the above 4 portfolios from January 2008 to January 2019:

Image

Here is the original strategy compared to the 1-month lookback risk-parity with TMF/UPRO from 1987 to 2019:

Image
Moto, I want to be sure I'm not inadvertently conflating two distinct concepts. When you say 'risk parity' do you mean 'inverse volatility'? If no, what is the distinction? I ran both in PV and the mix as of today ( 42.34% TMF / 57.66% UPRO) is identical for both approaches.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

coingaroo wrote: Tue Jul 23, 2019 4:25 am Because OP hasn’t shown a keen interest in modern finance and asset management research.
I would not call data overfitting and market timing “modern finance”
There are goods and bads; no finance professional would plop down and play with 40% UPRO / 60% TMF in a backtester, and yet this thread is probably one of the best contributions to DIY investing in the past year.
You’re welcome.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

mikestorm wrote: Tue Jul 23, 2019 7:27 am
MotoTrojan wrote: Wed Jul 17, 2019 9:37 pm Just discovered saved benchmarks in PV, whichs makes it a lot easier to compare conventional portfolios with market timing strategies.

Portfolio 1: 50/50 VEDTX (EDV) & TMF as combined bond component, rebalanced monthly for risk-parity w/ UPRO (20 day look-back)
Portfolio 2: TMF & UPRO rebalanced monthly for risk-parity
Portfolio 3: Original 40/60 UPRO/TMF quarterly rebalance
S&P500

The TMF/UPRO risk-parity is a significant boost in returns, but you can still get a significant leg-up on the original strategy with significantly less risk/drawdown via the risk-parity variant dosed with EDV. Shown here are the above 4 portfolios from January 2008 to January 2019:

Image

Here is the original strategy compared to the 1-month lookback risk-parity with TMF/UPRO from 1987 to 2019:

Image
Moto, I want to be sure I'm not inadvertently conflating two distinct concepts. When you say 'risk parity' do you mean 'inverse volatility'? If no, what is the distinction? I ran both in PV and the mix as of today ( 42.34% TMF / 57.66% UPRO) is identical for both approaches.
When only using two assets there is no difference between inverse volatility and risk parity. I haven’t focused much on >2 assets but I believe risk parity weights correlation mildly while inverse volatility ignores it. The equations give identical results though at 2 assets.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 7:57 am
coingaroo wrote: Tue Jul 23, 2019 4:25 am Because OP hasn’t shown a keen interest in modern finance and asset management research.
I would not call data overfitting and market timing “modern finance”

Apologies for continuing my devils advocacy, but how is your quarterly rebalance not overfitting?
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

MotoTrojan wrote: Tue Jul 23, 2019 9:01 am
HEDGEFUNDIE wrote: Tue Jul 23, 2019 7:57 am
coingaroo wrote: Tue Jul 23, 2019 4:25 am Because OP hasn’t shown a keen interest in modern finance and asset management research.
I would not call data overfitting and market timing “modern finance”

Apologies for continuing my devils advocacy, but how is your quarterly rebalance not overfitting?
I have never claimed an intellectual justification for the quarterly rebalance. You have to rebalance at some point, might as well be the period with the best historical performance.

But one month lookback for volatility targeting? If that’s not overfitting I don’t know what is.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 9:04 am
MotoTrojan wrote: Tue Jul 23, 2019 9:01 am
HEDGEFUNDIE wrote: Tue Jul 23, 2019 7:57 am
coingaroo wrote: Tue Jul 23, 2019 4:25 am Because OP hasn’t shown a keen interest in modern finance and asset management research.
I would not call data overfitting and market timing “modern finance”

Apologies for continuing my devils advocacy, but how is your quarterly rebalance not overfitting?
I have never claimed an intellectual justification for the quarterly rebalance. You have to rebalance at some point, might as well be the period with the best historical performance.

But one month lookback for volatility targeting? If that’s not overfitting I don’t know what is.
Fair enough. There was a steady improvement in risk-adjusted return as the look-back got shorter so 1 month is more a balance on trading costs and effort.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dspencer »

HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
Thanks for weighing in. This thread has become a little too much "backtesting gone wild" for my taste. If, like for me and some others, this is a few percentage points of an otherwise traditional portfolio it seems counterproductive to dilute the concept too much. However, I'm happy others are adding ideas which offer reduced risk or protection for specific risks (mostly high inflation). I could see changing eventually for a few reasons:

1. The portfolio works well for a while and now represents a more significant portion of my assets and my timeline to retirement is shorter.
2. Interest rates are lowered to the point where it seems like the Fed is "out of ammo" and confidence in the negative correlation continuing is reduced.
3. The political/economic climate makes me believe the risk of high inflation has substantially increased.

Admitting this is not a very Boglehead line of thought, I'm specifically curious about #2. Market timing is hard. But monitoring interest rate changes and making adjustments after the fact is not. For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

dspencer wrote: Tue Jul 23, 2019 10:57 am For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
You mean the period starting in 2009 when the 40/60 original strategy went on to deliver 29% CAGR for the next 10 years (and counting)?
Last edited by HEDGEFUNDIE on Tue Jul 23, 2019 11:15 am, edited 1 time in total.
PluckyDucky
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by PluckyDucky »

dspencer wrote: Tue Jul 23, 2019 10:57 am ...
Admitting this is not a very Boglehead line of thought, I'm specifically curious about #2. Market timing is hard. But monitoring interest rate changes and making adjustments after the fact is not. For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
If the market had a significant drop and rates dropped to zero, UPRO would have tanked and TMF popped. You would be rebalancing already from TMF to UPRO. I'd probably increase allocation to UPRO too.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 11:00 am
dspencer wrote: Tue Jul 23, 2019 10:57 am For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
You mean the period starting in 2009 when the 40/60 original strategy went on to deliver 29% CAGR for the next 10 years (and counting)?
I think a better question from dspencer would be how to react to 10 or 20 year treasuries getting close to (or below) zero. The Fed rate isn't directly driving returns in this portfolio.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 11:00 am
dspencer wrote: Tue Jul 23, 2019 10:57 am For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
You mean the period starting in 2009 when the 40/60 original strategy went on to deliver 29% CAGR for the next 10 years (and counting)?
Seeing closer to 22.6%. The 1-month look-back was closer at 26.4% though ;).
dspencer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dspencer »

MotoTrojan wrote: Tue Jul 23, 2019 11:56 am
HEDGEFUNDIE wrote: Tue Jul 23, 2019 11:00 am
dspencer wrote: Tue Jul 23, 2019 10:57 am For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
You mean the period starting in 2009 when the 40/60 original strategy went on to deliver 29% CAGR for the next 10 years (and counting)?
I think a better question from dspencer would be how to react to 10 or 20 year treasuries getting close to (or below) zero. The Fed rate isn't directly driving returns in this portfolio.
Yes, sorry I am conflating the fed rate and LTT. But the strategy relies on monetary policy providing the driving force for a negative correlation, right? It seems like there should be some lower boundary on rates where the "stock market insurance" can't be expected to payout.

I realize that the strategy worked great following 2009, but what if there was another severe economic shock before interest rates had recovered somewhat? Maybe there's just nothing to be done to protect at that point.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

dspencer wrote: Tue Jul 23, 2019 12:44 pm
MotoTrojan wrote: Tue Jul 23, 2019 11:56 am
HEDGEFUNDIE wrote: Tue Jul 23, 2019 11:00 am
dspencer wrote: Tue Jul 23, 2019 10:57 am For the sake of argument, if the stock market has a significant drop and the Fed drops rates to near zero, would you adjust your allocation at that point?
You mean the period starting in 2009 when the 40/60 original strategy went on to deliver 29% CAGR for the next 10 years (and counting)?
I think a better question from dspencer would be how to react to 10 or 20 year treasuries getting close to (or below) zero. The Fed rate isn't directly driving returns in this portfolio.
Yes, sorry I am conflating the fed rate and LTT. But the strategy relies on monetary policy providing the driving force for a negative correlation, right? It seems like there should be some lower boundary on rates where the "stock market insurance" can't be expected to payout.

I realize that the strategy worked great following 2009, but what if there was another severe economic shock before interest rates had recovered somewhat? Maybe there's just nothing to be done to protect at that point.
Again though it’s the LTT rates that matter. The Fed can also buy large amounts of treasuries and drive rates down that way. Several other countries have negative 10 year yields, we are still around 2%.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

dspencer wrote: Tue Jul 23, 2019 12:44 pm I realize that the strategy worked great following 2009, but what if there was another severe economic shock before interest rates had recovered somewhat? Maybe there's just nothing to be done to protect at that point.
Gold was up in 2011, when there were fears of a "double dip" recession. In the summer and in September, many newspapers were publishing headlines on "double dip" as gold shot higher. (Some people shouldn't hold gold because they don't believe in it, of course, in which case they just have to hold on for an economic recovery.)
caklim00
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 »

I've torn through this thread but not sure if I've seen this addressed. Since UPRO/TMF started as a small portion of your investible money (15%) and you are just using this a lottery ticket and the other 85% as regular investing, why not 50%/50% instead of 40%60%. It seems like you are trying to create an envrionment that has similar downturns to 100% S&P 500 but with higher upside. Why not risk a bit more downside for more upside.

Is there something magical about 40/60 in terms of diversification benefit over 50/50?

I definitely don't have it in me to invest that much in a strategy such as this one, but if one is playing with say 10k (or other small amount) why not go 50/50 instead of 40/60?
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

caklim00 wrote: Tue Jul 23, 2019 2:03 pm I've torn through this thread but not sure if I've seen this addressed. Since UPRO/TMF started as a small portion of your investible money (15%) and you are just using this a lottery ticket and the other 85% as regular investing, why not 50%/50% instead of 40%60%. It seems like you are trying to create an envrionment that has similar downturns to 100% S&P 500 but with higher upside. Why not risk a bit more downside for more upside.

Is there something magical about 40/60 in terms of diversification benefit over 50/50?

I definitely don't have it in me to invest that much in a strategy such as this one, but if one is playing with say 10k (or other small amount) why not go 50/50 instead of 40/60?
Long run risk parity is achieved at 40/60. Simple as that.
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 2:35 pm
caklim00 wrote: Tue Jul 23, 2019 2:03 pm I've torn through this thread but not sure if I've seen this addressed. Since UPRO/TMF started as a small portion of your investible money (15%) and you are just using this a lottery ticket and the other 85% as regular investing, why not 50%/50% instead of 40%60%. It seems like you are trying to create an envrionment that has similar downturns to 100% S&P 500 but with higher upside. Why not risk a bit more downside for more upside.

Is there something magical about 40/60 in terms of diversification benefit over 50/50?

I definitely don't have it in me to invest that much in a strategy such as this one, but if one is playing with say 10k (or other small amount) why not go 50/50 instead of 40/60?
Long run risk parity is achieved at 40/60. Simple as that.
Maybe you can dumb it down for me as my statistics is quite rusty... Why do you care about risk parity with a lottery ticket? I understand the strategy relies on diversification from uncorellated assets and then rebalancing but where is expected return maxed at?
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

caklim00 wrote: Tue Jul 23, 2019 3:03 pm
HEDGEFUNDIE wrote: Tue Jul 23, 2019 2:35 pm
caklim00 wrote: Tue Jul 23, 2019 2:03 pm I've torn through this thread but not sure if I've seen this addressed. Since UPRO/TMF started as a small portion of your investible money (15%) and you are just using this a lottery ticket and the other 85% as regular investing, why not 50%/50% instead of 40%60%. It seems like you are trying to create an envrionment that has similar downturns to 100% S&P 500 but with higher upside. Why not risk a bit more downside for more upside.

Is there something magical about 40/60 in terms of diversification benefit over 50/50?

I definitely don't have it in me to invest that much in a strategy such as this one, but if one is playing with say 10k (or other small amount) why not go 50/50 instead of 40/60?
Long run risk parity is achieved at 40/60. Simple as that.
Maybe you can dumb it down for me as my statistics is quite rusty... Why do you care about risk parity with a lottery ticket? I understand the strategy relies on diversification from uncorellated assets and then rebalancing but where is expected return maxed at?
Image

Backtest from 1982-2018. Note the Max Drawdown and the Correlation to US Market.
caklim00
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 3:11 pm
caklim00 wrote: Tue Jul 23, 2019 3:03 pm
HEDGEFUNDIE wrote: Tue Jul 23, 2019 2:35 pm
caklim00 wrote: Tue Jul 23, 2019 2:03 pm I've torn through this thread but not sure if I've seen this addressed. Since UPRO/TMF started as a small portion of your investible money (15%) and you are just using this a lottery ticket and the other 85% as regular investing, why not 50%/50% instead of 40%60%. It seems like you are trying to create an envrionment that has similar downturns to 100% S&P 500 but with higher upside. Why not risk a bit more downside for more upside.

Is there something magical about 40/60 in terms of diversification benefit over 50/50?

I definitely don't have it in me to invest that much in a strategy such as this one, but if one is playing with say 10k (or other small amount) why not go 50/50 instead of 40/60?
Long run risk parity is achieved at 40/60. Simple as that.
Maybe you can dumb it down for me as my statistics is quite rusty... Why do you care about risk parity with a lottery ticket? I understand the strategy relies on diversification from uncorellated assets and then rebalancing but where is expected return maxed at?
Image

Backtest from 1982-2018. Note the Max Drawdown and the Correlation to US Market.
Thanks for the details. Very helpful (and thanks for putting in my hypothetical 10K amount). It is interesting that Max Drawdown for 50/50 was 11% higher than 40/60 but its worst year wasn't as bad. Very peculiar. Definitley makes sense that the higher the TMF allocation the lower the market correlation. One thing that gives me pause is that we are currently in a low interest rate envrionment. I'm highly considering moving 10k of my iscf allocation (only thing I can move without a penalty right now) to M1 and putting 10K in 50% each doing regualr rebalancing and let it ride. I might monthly rebalance though instead of quarterly. I'll just exclude this from my asset allocation. I didn't even know about M1 until I read this thread.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

caklim00 wrote: Tue Jul 23, 2019 6:19 pm
I might monthly rebalance though instead of quarterly. I'll just exclude this from my asset allocation. I didn't even know about M1 until I read this thread.
Historically going 50/50 and rebalancing monthly would be a poor plan. In an equity decline you will be rebalancing into the drawdown, increasing your losses quite significantly. Nobody knows what will happen in the future.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

caklim00 wrote: Tue Jul 23, 2019 6:19 pmI'm highly considering moving 10k of my iscf allocation (only thing I can move without a penalty right now) to M1 and putting 10K in 50% each doing regualr rebalancing and let it ride
I personally would expect your 50% / 50% allocation to do a little better in the long run, starting from 2019 not it's-an-all-time-LTT-yield-high 1982. Nothing wrong with it.

Apparently quarterly did best in the past. Maybe it has something to do with the Fed and earnings news cycle. I can't find any reason to do monthly, it seemed consistently just a bit worse in the past.
butricksaid
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by butricksaid »

HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
HEDGEFUNDIE, I've been following this post and I admire your conviction to this strategy based on the research you've done. I am in a pretty good financial position myself and have strongly considered this with a 100k fraction of my own NW. A couple of questions for you:
  • When you say rebalance quarterly do you mean end of Q1/2/3/4 (March 31st, June 30th, etc) or arbitrarily 3 months from when you started?
  • Generally we are encouraged not to try to time the market but in this case, would it make more sense to rotate existing investment funds into this "lottery ticket" portfolio during a downturn? It seems like holding out for this to happen is well worth the return overall.
Thanks
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

butricksaid wrote: Tue Jul 23, 2019 7:27 pm
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
HEDGEFUNDIE, I've been following this post and I admire your conviction to this strategy based on the research you've done. I am in a pretty good financial position myself and have strongly considered this with a 100k fraction of my own NW. A couple of questions for you:
  • When you say rebalance quarterly do you mean end of Q1/2/3/4 (March 31st, June 30th, etc) or arbitrarily 3 months from when you started?
  • Generally we are encouraged not to try to time the market but in this case, would it make more sense to rotate existing investment funds into this "lottery ticket" portfolio during a downturn? It seems like holding out for this to happen is well worth the return overall.
Thanks
If you’re going to market time just buy TQQQ after a downturn and hold on.
caklim00
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by caklim00 »

MotoTrojan wrote: Tue Jul 23, 2019 6:21 pm
caklim00 wrote: Tue Jul 23, 2019 6:19 pm
I might monthly rebalance though instead of quarterly. I'll just exclude this from my asset allocation. I didn't even know about M1 until I read this thread.
Historically going 50/50 and rebalancing monthly would be a poor plan. In an equity decline you will be rebalancing into the drawdown, increasing your losses quite significantly. Nobody knows what will happen in the future.
Noted about the rebalancing. yes, that would make sense that catching the falling 3x knife 12 times in a year would be much worse than 4. guess there wouldn't be as much upside, but then again this strategy is supposed to be somewhat market agnostic. I don't think I have the fortitude to pull the trigger on 100K which would amount to a decent chunk of my IRA, but for 10K I can see doing this and sleeping easy. Heck, ISCF and SLYV haven't exactly been barnbusters for me recently in my IRA, but with diversified SCV I'm comfortable holding a large amount for decades. This is more similar to my small RZV investment I made years ago. Only difference is I would need to quartelry rebalance. I wonder if M1 can automate that so i don't even need to look?
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

caklim00 wrote: Tue Jul 23, 2019 8:07 pm I wonder if M1 can automate that so i don't even need to look?
Not really but if their website layout stays the same you could block out your balance every time and just press the button :twisted: .
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by HEDGEFUNDIE »

butricksaid wrote: Tue Jul 23, 2019 7:27 pm
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm I will not be adjusting my allocation to any of these new approaches, and here’s why.

To me, this strategy is a supercharged bet on the long run outperformance of the US economy. To the extent that the future resembles the past, the original 40/60 UPRO/TMF will outperform any alternative allocation that includes gold, international stocks, etc.

In my ordinary portfolio, I definitely hold developed market stocks, emerging market stocks, etc, to balance out the risk that the US will not outperform going forward. But for this lottery ticket, I see no point in diluting the payoff. It either works and delivers serious outperformance, or it doesn’t and performs similarly to a 100% S&P allocation. No middle ground is necessary or desired.
HEDGEFUNDIE, I've been following this post and I admire your conviction to this strategy based on the research you've done. I am in a pretty good financial position myself and have strongly considered this with a 100k fraction of my own NW. A couple of questions for you:
  • When you say rebalance quarterly do you mean end of Q1/2/3/4 (March 31st, June 30th, etc) or arbitrarily 3 months from when you started?
  • Generally we are encouraged not to try to time the market but in this case, would it make more sense to rotate existing investment funds into this "lottery ticket" portfolio during a downturn? It seems like holding out for this to happen is well worth the return overall.
Thanks
1. There is no intellectual justification for the quarterly rebalance vs other time periods, so there is even less justification for choosing calendar quarterly vs “whenever you start quarterly”

2. Don’t market time. Just don’t.
WS1
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by WS1 »

This thread got a brief mention on the latest episode of the Animal Spirits podcast. I guess the party's over
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travelogue
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by travelogue »

WS1 wrote: Wed Jul 24, 2019 8:20 am This thread got a brief mention on the latest episode of the Animal Spirits podcast. I guess the party's over
Overcast link to segment: https://overcast.fm/+K6GE8vNhA

(Seems it’s not up at their blogs yet.)
JBeck
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by JBeck »

travelogue wrote: Wed Jul 24, 2019 8:24 am
WS1 wrote: Wed Jul 24, 2019 8:20 am This thread got a brief mention on the latest episode of the Animal Spirits podcast. I guess the party's over
Overcast link to segment: https://overcast.fm/+K6GE8vNhA

(Seems it’s not up at their blogs yet.)
Podcast is 40+ minutes long; any chance you can give us the cliff notes?
NMBob
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by NMBob »

there is a time mark bar sitting on the top of the big square window, drag it to the 30min:30 sec mark to find it. 4 minutes at that point.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

JBeck wrote: Wed Jul 24, 2019 8:29 am
travelogue wrote: Wed Jul 24, 2019 8:24 am
WS1 wrote: Wed Jul 24, 2019 8:20 am This thread got a brief mention on the latest episode of the Animal Spirits podcast. I guess the party's over
Overcast link to segment: https://overcast.fm/+K6GE8vNhA

(Seems it’s not up at their blogs yet.)
Podcast is 40+ minutes long; any chance you can give us the cliff notes?
Basically said interesting strategy but their fact-checking guy said it would've had a 70% drawdown from 1960-1980 (guess they didn't read the entire thread) and they noted a few other divergences when the S&P500 was modestly down single-digits and the strategy was down 15-30%. Not overly critical and said if you like juiced returns with lots of risk it could be appealing but makes sense to keep at a small amount of portfolio so you aren't scared out of it.
jaj2276
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by jaj2276 »

HEDGEFUNDIE wrote: Tue Jul 23, 2019 8:51 pm
butricksaid wrote: Tue Jul 23, 2019 7:27 pm
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm ...
...
1. There is no intellectual justification for the quarterly rebalance vs other time periods, so there is even less justification for choosing calendar quarterly vs “whenever you start quarterly”

2. Don’t market time. Just don’t.
Not sure if this is intellectual or not, but the justification for choosing calendar quarterly over "whenever you start quarterly" is that it will be easier to remember if you choose calendar quarterly. Three years in the future are you going to remember that you funded this on July 23?
samsdad
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by samsdad »

[quote]
Not sure if this is intellectual or not, but the justification for choosing calendar quarterly over "whenever you start quarterly" is that it will be easier to remember if you choose calendar quarterly. Three years in the future are you going to remember that you funded this on July 23?
[/quote]
+1

That’s what I did. My first rebalance was “premature” but now I’m on the calendar quarter. Plus, the dividends plop out around then too.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

jaj2276 wrote: Wed Jul 24, 2019 11:06 am
HEDGEFUNDIE wrote: Tue Jul 23, 2019 8:51 pm
butricksaid wrote: Tue Jul 23, 2019 7:27 pm
HEDGEFUNDIE wrote: Mon Jul 22, 2019 7:27 pm ...
...
1. There is no intellectual justification for the quarterly rebalance vs other time periods, so there is even less justification for choosing calendar quarterly vs “whenever you start quarterly”

2. Don’t market time. Just don’t.
Not sure if this is intellectual or not, but the justification for choosing calendar quarterly over "whenever you start quarterly" is that it will be easier to remember if you choose calendar quarterly. Three years in the future are you going to remember that you funded this on July 23?
Maybe I am wired differently but I have a spreadsheet tab for this strategy alone which logs the rebalancing date, allocations prior to, allocation I am setting it to (target parity), average allocation to UPRO, etc... so I have an easy resource to see when I rebalanced.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by privatefarmer »

JBeck wrote: Wed Jul 24, 2019 8:29 am
travelogue wrote: Wed Jul 24, 2019 8:24 am
WS1 wrote: Wed Jul 24, 2019 8:20 am This thread got a brief mention on the latest episode of the Animal Spirits podcast. I guess the party's over
Overcast link to segment: https://overcast.fm/+K6GE8vNhA

(Seems it’s not up at their blogs yet.)
Podcast is 40+ minutes long; any chance you can give us the cliff notes?
I had emailed them over a month ago and asked if they’d review this topic/forum. They responded with a link to an article that Michael had previously written on risk parity.

I think if anything this forum will help to disprove some of the criticisms of levered ETFs. They can work long term. They aren’t perfect, there is volatility drag, however they can be used to obtain leveraged access to different asset classes.
dave_k
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dave_k »

samsdad wrote: Wed Jul 24, 2019 11:31 am That’s what I did. My first rebalance was “premature” but now I’m on the calendar quarter. Plus, the dividends plop out around then too.
+1 - same reason
Freefun
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by Freefun »

Ok, I bought into this around end of May. 60/40 TMF/UPRO. Now I’m about 50/50. When should I rebalance - once a quarter? So do I wait until end of august or rebalance now since it’s deviated a bit?
Remember when you wanted what you currently have?
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

Freefun wrote: Wed Jul 24, 2019 2:31 pm Ok, I bought into this around end of May. 60/40 TMF/UPRO. Now I’m about 50/50. When should I rebalance - once a quarter? So do I wait until end of august or rebalance now since it’s deviated a bit?
Whatever you do I’d setup a strict plan and stick to it. If you want time-based, quarterly is the way to go historically. 50/50 is a pretty small deviation from balance so hopefully that isn’t making you uncomfortable. Expect much bigger swings.
dspencer
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by dspencer »

Freefun wrote: Wed Jul 24, 2019 2:31 pm Ok, I bought into this around end of May. 60/40 TMF/UPRO. Now I’m about 50/50. When should I rebalance - once a quarter? So do I wait until end of august or rebalance now since it’s deviated a bit?
There's many posts devoted to how often to rebalance and there's not a consensus but I'm guessing quarterly will be the most common. If you're doing quarterly, then doing it now based off of deviation is not following the plan. Personally, I plan to do quarterly based on the calendar for simplicity. If you decide to do that then you might do it now since it would be over a quarter otherwise. It's pretty much a coin flip as to what will end up better.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
I've actually made my changes. Unlike others in this thread, I haven't started a play money or side bet account. I was able to buy PSLDX in the Roth IRAs at Vanguard and in my 401k by using a Schwab PCRA brokerage window. The fees were $20 x 2 at Vanguard and $49.95 x 1 at Schwab.

I decided that I really like PSLDX (S&P 500 and long-term treasury/corporate/other bonds) in tax-advantaged. Part of the reason I like it is behavioral. It generally hugs the S&P 500 index with some of what might be called "alpha" from using bonds, which is ideal for someone who tends to be happy when not underperforming the market. Another behavioral aspect is that there is no button-pushing. This is huge, we're not robots. I didn't even check the financial news at all in 2018 and didn't know there was a stock correction in December until this summer. Ignorance is bliss, I guess. Another reason is that it was easy to explain and get my spouse on board. Having it go through 2008, for real, and be basically fine is another selling point. Being at PIMCO instead of a tiny ETF provider is another selling point. Not having to wonder about optimal rebalancing strategies or forgetting to do it optimally could be considered a plus. Being able to focus more free time and energy on other, income-generating opportunities is a plus. Not having to worry about what would happen if someone inherited the account and left it alone is a plus.

I also decided that I didn't like PISIX, the international fund. They're a bit too active for my tastes on the bond side, whipping around their duration exposure based on manager decisions, I guess because they have no "secondary index" or duration target like PSLDX (that secondary index and duration target forces the PSLDX guys to be sort-of closet indexers at heart, which is good).

The other reason that I don't like PISIX is that PSLDX is too darn good. It takes up valuable tax-advantaged space that is better used by PSLDX, which throws off more income on the bond side. My goal is actually to have 100% of tax advantaged in PSLDX, while keeping international in taxable. I'm not there yet, need to build up my taxable account more. Currently I'm a a little over 80% of tax advantaged in PSLDX, the rest in the institutional version of VXUS (ex-US world equities). Over time, I'd like to shift to using IXUS in taxable (since it seems somewhat more tax-efficient than VXUS) for my international exposure.

Personal Capital says my allocation now looks like this:

-92.8% Cash
13.95% International Bonds
77.7% US Bonds
17.44% International Stock
80.55% US Stock
3.34% Alternatives (Real Estate, etc.)

My paycheck 401k contributions (traditional and after-tax) are going to the international stock fund.
columbia
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by columbia »

It’s certainly an intriguing fund.

What’s the actual dividend yield? That PIMCO site confuses me.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

columbia wrote: Wed Jul 24, 2019 5:31 pm It’s certainly an intriguing fund.

What’s the actual dividend yield? That PIMCO site confuses me.
Ignore the yield and focus on it's total return. This fund should never be held in taxable.
columbia
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by columbia »

MotoTrojan wrote: Wed Jul 24, 2019 5:40 pm
columbia wrote: Wed Jul 24, 2019 5:31 pm It’s certainly an intriguing fund.

What’s the actual dividend yield? That PIMCO site confuses me.
Ignore the yield and focus on it's total return. This fund should never be held in taxable.
I asked because it lists a distribution yield north of 11%. I’m not sure how to process that.
https://www.pimco.com/en-us/investments ... -fund/inst
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

MoneyMarathon wrote: Wed Jul 24, 2019 5:19 pm
JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
I've actually made my changes. Unlike others in this thread, I haven't started a play money or side bet account. I was able to buy PSLDX in the Roth IRAs at Vanguard and in my 401k by using a Schwab PCRA brokerage window. The fees were $20 x 2 at Vanguard and $49.95 x 1 at Schwab.

I decided that I really like PSLDX (S&P 500 and long-term treasury/corporate/other bonds) in tax-advantaged. Part of the reason I like it is behavioral. It generally hugs the S&P 500 index with some of what might be called "alpha" from using bonds, which is ideal for someone who tends to be happy when not underperforming the market. Another behavioral aspect is that there is no button-pushing. This is huge, we're not robots. I didn't even check the financial news at all in 2018 and didn't know there was a stock correction in December until this summer. Ignorance is bliss, I guess. Another reason is that it was easy to explain and get my spouse on board. Having it go through 2008, for real, and be basically fine is another selling point. Being at PIMCO instead of a tiny ETF provider is another selling point. Not having to wonder about optimal rebalancing strategies or forgetting to do it optimally could be considered a plus. Being able to focus more free time and energy on other, income-generating opportunities is a plus. Not having to worry about what would happen if someone inherited the account and left it alone is a plus.

I also decided that I didn't like PISIX, the international fund. They're a bit too active for my tastes on the bond side, whipping around their duration exposure based on manager decisions, I guess because they have no "secondary index" or duration target like PSLDX (that secondary index and duration target forces the PSLDX guys to be sort-of closet indexers at heart, which is good).

The other reason that I don't like PISIX is that PSLDX is too darn good. It takes up valuable tax-advantaged space that is better used by PSLDX, which throws off more income on the bond side. My goal is actually to have 100% of tax advantaged in PSLDX, while keeping international in taxable. I'm not there yet, need to build up my taxable account more. Currently I'm a a little over 80% of tax advantaged in PSLDX, the rest in the institutional version of VXUS (ex-US world equities). Over time, I'd like to shift to using IXUS in taxable (since it seems somewhat more tax-efficient than VXUS) for my international exposure.

Personal Capital says my allocation now looks like this:

-92.8% Cash
13.95% International Bonds
77.7% US Bonds
17.44% International Stock
80.55% US Stock
3.34% Alternatives (Real Estate, etc.)

My paycheck 401k contributions (traditional and after-tax) are going to the international stock fund.
Very cool, how much of your total portfolio does this make up? Based on the -93% cash it seems like a good chunk. Remind me what the minimum purchase amount was at Vanguard? Also what is the target duration range for this fund?

Very interesting fund indeed and your aversion to needing to press buttons or pay attention makes sense. I quite like that I get to "manage" this side portfolio while my buy & hold rides into the night. This eventually will be a side-bet portfolio as it gets dwarfed, but is currently 25% of my investments.

FWIW I settled on the UPRO 1-month look-back volatility balance against a 50/50 TMF/EDV bond-side. Will be a wild ride and I look forward to it!
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

columbia wrote: Wed Jul 24, 2019 5:46 pm
MotoTrojan wrote: Wed Jul 24, 2019 5:40 pm
columbia wrote: Wed Jul 24, 2019 5:31 pm It’s certainly an intriguing fund.

What’s the actual dividend yield? That PIMCO site confuses me.
Ignore the yield and focus on it's total return. This fund should never be held in taxable.
I asked because it lists a distribution yield north of 11%. I’m not sure how to process that.
https://www.pimco.com/en-us/investments ... -fund/inst
I don't know the specifics but this is just a mechanism of how it returns income from the derivatives used to generate leverage. Don't think of this like a traditional equity dividend yield. Price will often decline but total return can still be positive due to the high yield.
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

MotoTrojan wrote: Wed Jul 24, 2019 5:49 pm
MoneyMarathon wrote: Wed Jul 24, 2019 5:19 pm
JBeck wrote: Sun Jul 21, 2019 6:41 pm Curious as to if anyone has decided to change their asset allocation based on all the possible alternatives MoneyMarathon has provided
I've actually made my changes. Unlike others in this thread, I haven't started a play money or side bet account. I was able to buy PSLDX in the Roth IRAs at Vanguard and in my 401k by using a Schwab PCRA brokerage window. The fees were $20 x 2 at Vanguard and $49.95 x 1 at Schwab.

I decided that I really like PSLDX (S&P 500 and long-term treasury/corporate/other bonds) in tax-advantaged. Part of the reason I like it is behavioral. It generally hugs the S&P 500 index with some of what might be called "alpha" from using bonds, which is ideal for someone who tends to be happy when not underperforming the market. Another behavioral aspect is that there is no button-pushing. This is huge, we're not robots. I didn't even check the financial news at all in 2018 and didn't know there was a stock correction in December until this summer. Ignorance is bliss, I guess. Another reason is that it was easy to explain and get my spouse on board. Having it go through 2008, for real, and be basically fine is another selling point. Being at PIMCO instead of a tiny ETF provider is another selling point. Not having to wonder about optimal rebalancing strategies or forgetting to do it optimally could be considered a plus. Being able to focus more free time and energy on other, income-generating opportunities is a plus. Not having to worry about what would happen if someone inherited the account and left it alone is a plus.

I also decided that I didn't like PISIX, the international fund. They're a bit too active for my tastes on the bond side, whipping around their duration exposure based on manager decisions, I guess because they have no "secondary index" or duration target like PSLDX (that secondary index and duration target forces the PSLDX guys to be sort-of closet indexers at heart, which is good).

The other reason that I don't like PISIX is that PSLDX is too darn good. It takes up valuable tax-advantaged space that is better used by PSLDX, which throws off more income on the bond side. My goal is actually to have 100% of tax advantaged in PSLDX, while keeping international in taxable. I'm not there yet, need to build up my taxable account more. Currently I'm a a little over 80% of tax advantaged in PSLDX, the rest in the institutional version of VXUS (ex-US world equities). Over time, I'd like to shift to using IXUS in taxable (since it seems somewhat more tax-efficient than VXUS) for my international exposure.

Personal Capital says my allocation now looks like this:

-92.8% Cash
13.95% International Bonds
77.7% US Bonds
17.44% International Stock
80.55% US Stock
3.34% Alternatives (Real Estate, etc.)

My paycheck 401k contributions (traditional and after-tax) are going to the international stock fund.
Very cool, how much of your total portfolio does this make up? Based on the -93% cash it seems like a good chunk.
I'm all in. My total portfolio is currently 82.5% PIMCO StocksPLUS® Long Duration Fund and 17.5% Vanguard Total Intl Stock Index Trust. Over the next few months I will add to the international side to bring it back to my international target.
MotoTrojan wrote: Wed Jul 24, 2019 5:49 pmRemind me what the minimum purchase amount was at Vanguard?
Minimum initial investment is $25000 at Vanguard, but it can also be bought with a $100 minimum and $10 fee at Ally Invest, which is the lowest fee I know of. Schwab PCRA let me buy it with a $1 minimum and $49.95 fee.
MotoTrojan wrote: Wed Jul 24, 2019 5:49 pmAlso what is the target duration range for this fund?
It's pegged to +/- 2 years from Bloomberg Barclays Long-Term Government/Credit Index. So it's roughly 12.5 to 16.5.

"PIMCO actively manages the Fixed Income Instruments held by the Fund with a view toward enhancing the Fund’s total return, subject to an overall portfolio duration which normally varies within two years (plus or minus) of the portfolio duration of the securities comprising the Bloomberg Barclays Long-Term Government/Credit Index, as calculated by PIMCO, which as of May 31, 2018 was 14.57 years. "
MotoTrojan wrote: Wed Jul 24, 2019 5:49 pmWill be a wild ride and I look forward to it!
Awesome!
MoneyMarathon
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MoneyMarathon »

columbia wrote: Wed Jul 24, 2019 5:46 pm I asked because it lists a distribution yield north of 11%. I’m not sure how to process that.
https://www.pimco.com/en-us/investments ... -fund/inst
I believe there are four components to its yield:
  • The actual bond dividends, which should be well-represented by the SEC yield (purely plus)
  • The short term and long term capital gains from sale of bond derivatives and bonds themselves (+/-)
  • The short term and long term capital gains from sale of S&P 500 derivatives (+/-)
  • Any trading or interest expenses that might not included in the expense ratio (purely minus)
The yield on the S&P 500 is generally reflected in the capital gains from the sale of S&P 500 derivatives because, under normal conditions when there is adequate liquidity in the futures market, the fund doesn't invest directly in the S&P 500. But capital gains on the sale of S&P 500 derivatives will generally benefit from the yield on the S&P 500.

The SEC yield is about 3.28% according to Morningstar on June 28th. This is all from actual bonds held.

The yield on the S&P 500 is about 1.94% on June 30th, and that should flow through into capital gains on S&P 500 derivatives.

It can get something like a 11% yield (sometimes) due to the capital gains it distributes, when stocks go up and bond prices go up (i.e. yields go down). Due to the use of derivatives and active management on the bond side, there is very high turnover, and it distributes a lot more in capital gains (many short term) than a passively invested fund. Because it distributes so much in capital gains, the price of the fund itself has gone down over its history, despite the fund doing very well if dividends and capital gains were reinvested.
columbia
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by columbia »

Excellent description. Thanks. :beer
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs]

Post by MotoTrojan »

MoneyMarathon wrote: Wed Jul 24, 2019 6:02 pm

It's pegged to +/- 2 years from Bloomberg Barclays Long-Term Government/Credit Index. So it's roughly 12.5 to 16.5.

Thank you. Skimmed some of the docs but couldn't find the target exposure. 100% equity and XX% bond?
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