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

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

Post by staythecourse » Fri Feb 15, 2019 5:28 pm

FIREmeup wrote:
Fri Feb 15, 2019 5:14 pm

That being said I wouldn't buy or sell these ETNs without a limit price, like any stock because a large order can execute at weird prices but then get back to equilibrium within a half second.
Just to clarify for others these are ETF and not ETN. TMF is invested in 70-80% TLT and the rest in cash and the swaps. UPRO is 70-80% companies to mimic the Sp500 and the rest in cash and swaps.

I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing. There is a risk in EVERY aspect of investing outside of typical boglehead investing so one just has to accept or reject this idea based on that risk. Have to dive in eyes wide open. One can't expect to make this level of returns without serious risk.

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

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

Post by Sola Scriptura » Fri Feb 15, 2019 5:45 pm

staythecourse wrote:
Fri Feb 15, 2019 5:28 pm

I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing. There is a risk in EVERY aspect of investing outside of typical boglehead investing so one just has to accept or reject this idea based on that risk. Have to dive in eyes wide open. One can't expect to make this level of returns without serious risk.

Good luck.
Agreed 100% on fund closure being the biggest risk to this strategy. The problem is that the only way to see if UPRO and TMF could survive such drastic downturns (whether simultaneous or not) is for the funds to actually experience them, which, obviously, none of us wants to happen.

This truly is a ride or die strategy: If you can't stomach potentially losing every single dollar you put in, it isn't for you.

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

Post by staythecourse » Fri Feb 15, 2019 6:01 pm

Sola Scriptura wrote:
Fri Feb 15, 2019 5:45 pm
This truly is a ride or die strategy:
I love that analogy. I am not as confident as Hedgiefund at the projected returns, but think it is a great concept. At this point, the only way to find out any more about the concept is to do it in REAL life and see what happens. I will just be writing off my contribution to this process. I compare this to the feeling a parents of Jeff Bezos must have felt when their kid came to them to borrow 200k to start this Amazon thing. I am assuming they that it was likely a sunk cost with a small lottery effect. This is how I feel. Best thing is it takes NO EFFORT on my part so even better then investing in a startup. The downside risk has already been mitigated as it is a small % of my liquid net worth (<3%).

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

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

Post by columbia » Fri Feb 15, 2019 6:21 pm

Why are folks using M1 Finance? You can’t buy them through Fidelity?

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

Post by aj76er » Fri Feb 15, 2019 7:24 pm

FIREmeup wrote:
Fri Feb 15, 2019 5:14 pm
That being said I wouldn't buy or sell these ETNs ETFs without a limit price, like any stock because a large order can execute at weird prices but then get back to equilibrium within a half second.
This may be a valid reason to avoid M1 and use a discount brokerage like Fidelity or Schwab that allows you to trade these ETFs directly. I believe M1 executes all it's outstanding trades one day per week (starting at 9am CST) and then pushes them throughout the course of the day. In order to get fast enough execution, they are likely doing simple market orders.

For different reasons (posted up-thread), I am executing this strategy at Fidelity, and for all my ETF trades I use marketable limit orders to protect against price spikes while still getting fast trade execution.

To execute a marketable limit order, you place a normal limit order and pay the spread.

For example:

current bid: $100
current ask: $103

For a buy order, set a limit order to purchase X number of shares at $103
For a sell order, set a limit order to sell X number of shares at $100

Under regulations, the exchange is required to honor the current ask price (for a buyer) and the current bid price (for a seller).

For fast moving ETFs like UPRO and TMF, it may take a few tries (as the price bounces around), but I feel it's good practice.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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

Post by aj76er » Fri Feb 15, 2019 7:38 pm

columbia wrote:
Fri Feb 15, 2019 6:21 pm
Why are folks using M1 Finance? You can’t buy them through Fidelity?
You can absolutely buy these at Fidelity (I do).
You must sign an extra agreement in order to so.

M1 has a nice platform that allows single-click rebalancing, commission-free trades, and fractional shares. So, those are the reasons folks are using it.

The following reasons are why I'm using Fidelity:
* Fidelity has a known, documented, and established Roth backdoor process
* M1 platform is new and comes with it's own risks (buyout, closure, fee hikes, etc...)
* I didn't want to deal with a new account, new security protocols, etc..
* (Potentially) better trade protection and execution (see comment up-thread)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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

Post by staythecourse » Fri Feb 15, 2019 7:55 pm

columbia wrote:
Fri Feb 15, 2019 6:21 pm
Why are folks using M1 Finance? You can’t buy them through Fidelity?
I am assuming (correct me if I am wrong) that these are just etf and can be bought/ sold on ANY brokerage platform. Vanguard (as most know now) has decided to ban leveraged funds so no go there, but every else should be good.

The reason I am doing it through M1 is that I want to set it up and then not even see it until it is time to rebalance. I figure the biggest (most likely) risk of this concept not working is behavioral. The best way to handle that is to do the Fidelity study move (in my opinion). Setting up a "Rip Van Wrinkle account" where one basically forgets about the account. That is hard to do when you see the funds everytime you login. I log in 1x/ month to reallocate new monies. That is 12x per year for me to make a behavioral mistake.

I own my own medical practice so I am going to time the rebalancing with my quarterly taxes. So my expectation is not to see this account except 4x/ year. It would be great if you good set up a auto rebalance feature at x time intervals, but until then I think this approach will work for me. I don't pay attention to market activity anyways so day to day new won't matter.

My goal, is to put x amount in and then not pay attention forever. I'm planning on gifting this amount to the kids so we are talking time horizon of >50 years.

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

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

Post by samsdad » Fri Feb 15, 2019 8:04 pm

columbia wrote:
Fri Feb 15, 2019 6:21 pm
Why are folks using M1 Finance? You can’t buy them through Fidelity?
I bought them at Fidelity in my tIRA. The commission ($4.95) is nothing to cry over and if I stick with it, which I probably will, I will convert to a Roth. I'm leaning towards an annual rebalancing FWIW, and my port will be 50/50.

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

Post by samsdad » Fri Feb 15, 2019 8:22 pm

Sola Scriptura wrote:
Fri Feb 15, 2019 5:45 pm
staythecourse wrote:
Fri Feb 15, 2019 5:28 pm

I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing. There is a risk in EVERY aspect of investing outside of typical boglehead investing so one just has to accept or reject this idea based on that risk. Have to dive in eyes wide open. One can't expect to make this level of returns without serious risk.

Good luck.
Agreed 100% on fund closure being the biggest risk to this strategy. The problem is that the only way to see if UPRO and TMF could survive such drastic downturns (whether simultaneous or not) is for the funds to actually experience them, which, obviously, none of us wants to happen.

This truly is a ride or die strategy: If you can't stomach potentially losing every single dollar you put in, it isn't for you.
In my mind, rightly or wrongly, this is actually less risky than investing in an individual stock. Both could go to zero. But here, there's active counterparty-risk mitigation involved. Moreover, there's the aforementioned market trading curbs. Finally, let's all remember we're investing in, at the end of the day, the Standard & Poor's 500 Index and the longest-term treasuries of the United States Government.

On the other hand, I'm not into this but for about 6% of my liquid investments. It'd sting if it crapped out. On the other hand, after sitting back and taking everything into account, I have been feeling lately that even at 100% equities in equal parts small/mid/large S&P index funds that I was playing it too safe. No risk, no reward. But risk is real. Thus my meagre contribution to this adventure. Again, I don't see this as being riskier than having 6% of my investments in individual stocks. When you look at other threads, rarely are those adventurers harangued for living a little on the wild side.

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

Post by BanditKing » Fri Feb 15, 2019 8:41 pm

staythecourse wrote:
Fri Feb 15, 2019 5:28 pm
I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing.
Might it not make sense to use more than one similar 3x ETF. Reduces the risk from one closing down. UPRO+SPXL for example. Do 20/20/60?
Last edited by BanditKing on Sat Feb 16, 2019 3:49 am, edited 2 times in total.

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

Post by interestediniras » Fri Feb 15, 2019 8:49 pm

Deleted.
Last edited by interestediniras on Wed Feb 27, 2019 4:32 pm, edited 1 time in total.

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

Post by staythecourse » Fri Feb 15, 2019 9:01 pm

BanditKing wrote:
Fri Feb 15, 2019 8:41 pm
staythecourse wrote:
Fri Feb 15, 2019 5:28 pm
I do agree with another poster above and mentioned it in one of the first posts on this thread the biggest risk is still the fund closing.
Might it not make sense to use more than one similar 3x account. Reduces the risk from one closing down. UPRO+SPXL for example. Do 20/20/60?
Interesting idea. That would decrease a single company risk and single manager risk, but does not remove the inherent risk of the concept of the entire 3x leveraged fund close closing its door to a wide systematic issue, i.e. 2008 or worse occurence.

I do like your idea though as it minimizes some stewardship issues. I may just do that. Anybody else on here want to comment on plus and minuses of the idea?

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 HomerJ » Fri Feb 15, 2019 10:44 pm

samsdad wrote:
Fri Feb 15, 2019 8:22 pm
On the other hand, I'm not into this but for about 6% of my liquid investments. It'd sting if it crapped out. On the other hand, after sitting back and taking everything into account, I have been feeling lately that even at 100% equities in equal parts small/mid/large S&P index funds that I was playing it too safe. No risk, no reward. But risk is real. Thus my meagre contribution to this adventure. Again, I don't see this as being riskier than having 6% of my investments in individual stocks. When you look at other threads, rarely are those adventurers harangued for living a little on the wild side.
What happens if it does well for a while, and it becomes 50% of your investments?
The J stands for Jay

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

Post by klaus14 » Fri Feb 15, 2019 10:55 pm

NTSX is a cheaper way to achieve some risk parity.
It invests 90% in SP500 and 10% is the collateral for treasury contracts to achieve 60% exposure.

If you do 50% NTSX and 50% EDV, It translates to 45% SP500 and 80% treasuries.

It is less leveraged but cost is considerably small. NTSX expense ratio is 0.20% and EDV is 0.07%.

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

Post by HEDGEFUNDIE » Fri Feb 15, 2019 11:48 pm

HomerJ wrote:
Fri Feb 15, 2019 10:44 pm
samsdad wrote:
Fri Feb 15, 2019 8:22 pm
On the other hand, I'm not into this but for about 6% of my liquid investments. It'd sting if it crapped out. On the other hand, after sitting back and taking everything into account, I have been feeling lately that even at 100% equities in equal parts small/mid/large S&P index funds that I was playing it too safe. No risk, no reward. But risk is real. Thus my meagre contribution to this adventure. Again, I don't see this as being riskier than having 6% of my investments in individual stocks. When you look at other threads, rarely are those adventurers harangued for living a little on the wild side.
What happens if it does well for a while, and it becomes 50% of your investments?
Why is this a bad thing? It means you’ve made a ton of money.

I hope everyone who does this over the long term (1) considers it a sunk cost and not a part of their overall AA and (2) has a specific goal in mind to stop playing.

Given how volatile this strategy is, you will never accumulate the big bucks, or successfully cash out the big bucks, without both (1) and (2) in place.

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

Post by interestediniras » Sat Feb 16, 2019 12:57 am

HEDGEFUNDIE wrote:
Fri Feb 15, 2019 11:48 pm
HomerJ wrote:
Fri Feb 15, 2019 10:44 pm
samsdad wrote:
Fri Feb 15, 2019 8:22 pm
On the other hand, I'm not into this but for about 6% of my liquid investments. It'd sting if it crapped out. On the other hand, after sitting back and taking everything into account, I have been feeling lately that even at 100% equities in equal parts small/mid/large S&P index funds that I was playing it too safe. No risk, no reward. But risk is real. Thus my meagre contribution to this adventure. Again, I don't see this as being riskier than having 6% of my investments in individual stocks. When you look at other threads, rarely are those adventurers harangued for living a little on the wild side.
What happens if it does well for a while, and it becomes 50% of your investments?
Why is this a bad thing? It means you’ve made a ton of money.

I hope everyone who does this over the long term (1) considers it a sunk cost and not a part of their overall AA and (2) has a specific goal in mind to stop playing.

Given how volatile this strategy is, you will never accumulate the big bucks, or successfully cash out the big bucks, without both (1) and (2) in place.
I vaguely agree with (2), except I think you should continuously deleverage as your position accumulates, because the marginal utility of money declines continuously, rather than following an arbitrary step function. You should simply have some sort of concrete idea of how your own marginal return on wealth declines, as it will be different per each individual.

I strongly disagree with (1). I think that's just playing a psychological game to overcome aversion to leverage. If you actually consider the theoretical principles to be sound, then you should obviously assign nonzero long term expected value to this strategy.

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

Post by Njm8845 » Sat Feb 16, 2019 1:12 am

Why not go 100% UPRO? If you’re willing to treat this as a lottery ticket, doesn’t that stand a better chance of reaching the $10M?

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

Post by interestediniras » Sat Feb 16, 2019 1:16 am

Deleted.
Last edited by interestediniras on Wed Feb 27, 2019 4:32 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 16, 2019 1:57 am

Njm8845 wrote:
Sat Feb 16, 2019 1:12 am
Why not go 100% UPRO? If you’re willing to treat this as a lottery ticket, doesn’t that stand a better chance of reaching the $10M?
Only if you assume no market crashes in the next two decades.

Since 2009 UPRO has delivered 35% CAGR. At that growth rate it would take ~15 years to grow $100k to $10M assuming no market crashes.

But if you had held UPRO from 2000, it would have taken you until 2017 to get back to even.
Last edited by HEDGEFUNDIE on Mon Feb 18, 2019 1:52 am, edited 1 time in total.

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

Post by UKFred » Sat Feb 16, 2019 2:35 am

finvestor wrote:
Fri Feb 15, 2019 7:06 am
Has anyone implemented (or considered implementing) this strategy in Europe? If so, which ETFs are you using? These days most europeans do not have access to US domiciled ETFs, so I was wondering if anyone knows good Europe domiciled ETFs to implement this strategy?
I am implementing this with 3UKL (leveraged FTSE 100) and 3GIL (leveraged gilts). I've run some basic tests over 1, 2 and 3 years (especially interested in the two sell-offs in 2018) and the strategy seems to work similar to the US ETFs. Of course these are in Sterling, not Euros.

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

Post by HomerJ » Sat Feb 16, 2019 2:58 am

HEDGEFUNDIE wrote:
Fri Feb 15, 2019 11:48 pm
HomerJ wrote:
Fri Feb 15, 2019 10:44 pm
samsdad wrote:
Fri Feb 15, 2019 8:22 pm
On the other hand, I'm not into this but for about 6% of my liquid investments. It'd sting if it crapped out. On the other hand, after sitting back and taking everything into account, I have been feeling lately that even at 100% equities in equal parts small/mid/large S&P index funds that I was playing it too safe. No risk, no reward. But risk is real. Thus my meagre contribution to this adventure. Again, I don't see this as being riskier than having 6% of my investments in individual stocks. When you look at other threads, rarely are those adventurers harangued for living a little on the wild side.
What happens if it does well for a while, and it becomes 50% of your investments?
Why is this a bad thing? It means you’ve made a ton of money.

I hope everyone who does this over the long term (1) considers it a sunk cost and not a part of their overall AA and (2) has a specific goal in mind to stop playing.

Given how volatile this strategy is, you will never accumulate the big bucks, or successfully cash out the big bucks, without both (1) and (2) in place.
I'm saying it's easy to just say "Oh, it's play money" right now. If it grows quite large, and you just let it ride, there WILL be some anxiety for most people (maybe not you, Mr. Cool as Cucumbers) :)

People anchor. If you have $600,000 in normal accounts, and your $10k play bet grows to $400,000, people are going to say "Hey, I'm worth a million dollars!" A smart move would be to take some risk off the table at that point. People WILL think about it, at least. It WILL be a source of some anxiety.

"Man, that's a huge chunk of my net worth riding on a bet".

If the risk shows up, and it drops to zero, very few people are going to say "Oh well, it was just $10k."
The J stands for Jay

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

Post by greenhill » Sat Feb 16, 2019 3:51 am

I suspect that the cost of leverage was MUCH higher in the past when the interest rate was higher. Is this factor accounted in your backtest?

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

Post by greenhill » Sat Feb 16, 2019 4:14 am

Btw, to hedge against inflationary recession like 1970s, *maybe* adding a small position in TIPS/gold will help a bit.

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

Post by interestediniras » Sat Feb 16, 2019 5:12 am

greenhill wrote:
Sat Feb 16, 2019 4:14 am
Btw, to hedge against inflationary recession like 1970s, *maybe* adding a small position in TIPS/gold will help a bit.
My suspicion is that rising interest rates are more important to hedge against (with intermediate term Treasuries), precisely because the lessons of the 1970s are still relatively fresh in the mind of the Federal Reserve, at least for the next 20 years or so.

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

Post by finvestor » Sat Feb 16, 2019 8:17 am

UKFred wrote:
Sat Feb 16, 2019 2:35 am
finvestor wrote:
Fri Feb 15, 2019 7:06 am
Has anyone implemented (or considered implementing) this strategy in Europe? If so, which ETFs are you using? These days most europeans do not have access to US domiciled ETFs, so I was wondering if anyone knows good Europe domiciled ETFs to implement this strategy?
I am implementing this with 3UKL (leveraged FTSE 100) and 3GIL (leveraged gilts). I've run some basic tests over 1, 2 and 3 years (especially interested in the two sell-offs in 2018) and the strategy seems to work similar to the US ETFs. Of course these are in Sterling, not Euros.
Thanks for the input. I spent some time on Google and found these 2X leveraged ETFs listed in the German exchange:

Stocks: Xtrackers S&P 500 2x Leveraged Daily Swap UCITS ETF (ISIN LU0411078552)
Bonds: Lyxor Bund Daily (2x) Leveraged UCITS ETF (ISIN FR0011023654)

Any comments on such a combination to implement this strategy in Europe? The German long-term bonds are, I suppose, the classic "flight to safety" assets, so one might expect them to provide some protection when the broad stock market crashes?

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

Post by samsdad » Sat Feb 16, 2019 8:47 am

Njm8845 wrote:
Sat Feb 16, 2019 1:12 am
Why not go 100% UPRO? If you’re willing to treat this as a lottery ticket, doesn’t that stand a better chance of reaching the $10M?
Looking at the simulated data going back to the 1950s that is based on the crude curve fitting we were performing above (before getting serious about taking into account the moving parts—a work in progress in the other thread), and even if off by the annual CAGR numbers that this crude data offers, it appears very clear that events like 1972/73, Black Monday, the dot-com crash, and the Great Recession, absolutely hobble a 100% UPRO portfolio vs. a mix of the two. That’s not some mental trick; that’s what the crude data shows. Maybe that’ll change with better data we’re trying to get together, I don’t know. But for now, that’s the bet I’d be making about the future.

Speaking of which, HomerJ, I am thinking the the future will be similar to the past at least in terms of how this port would respond to events similar to everything from the 70s onward. Is there some other event not covered in that timeframe that you’re thinking of that will leave our “good” AAs alone and would only ravage the “bad” one we’re talking about here? The Second Great Depression? How would that not crush a “traditional” AA too?

As for mental accounting and psychology, maybe I will take some money off the table when it explodes in value. Maybe I won’t. I’ve risked a very nominal amount, some of which comes from my Fidelity rewards. If it’s a mental game to think of it as something outside my “investing” stay-in-the-lines AA, then I’m alright with that for now.

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

Post by samsdad » Sat Feb 16, 2019 9:09 am

greenhill wrote:
Sat Feb 16, 2019 3:51 am
I suspect that the cost of leverage was MUCH higher in the past when the interest rate was higher. Is this factor accounted in your backtest?
That is something that’s being worked on in the the other thread.

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

Post by staythecourse » Sat Feb 16, 2019 9:15 am

Njm8845 wrote:
Sat Feb 16, 2019 1:12 am
Why not go 100% UPRO? If you’re willing to treat this as a lottery ticket, doesn’t that stand a better chance of reaching the $10M?
The problem is if 2008 occurs. It took 16 YEARS to break even again AFTER a 95% or so downswing. In Hedgiefund's first analysis the goal was 10M in 20 years. If 2008 occurs you are not reaching that in 20 years. Now if you time horizon is 50 years then yes I would think a 100% UPRO would be unlikely blow up in your face as you are giving MORE time for recovery, but then again the question is will laws/ policy and/or stewardship of the funds/ companies continue as same for the next 50 years? Who knows, but does add a wrinkle of counterparty risk when you talk about that far out time horizon.

I think the 20 year time horizon is the reason I would be hesitant to go 100% UPRO. Personally, I was planning on never touching the money and just gifting it to my heirs so maybe 100% UPRO is not such a bad idea?

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

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

Post by staythecourse » Sat Feb 16, 2019 9:32 am

samsdad wrote:
Sat Feb 16, 2019 8:47 am
If it’s a mental game to think of it as something outside my “investing” stay-in-the-lines AA, then I’m alright with that for now.
Agreed. I am not sure why this would be a bad thing. The big issue I have ALWAYS hated about behavioral finance is it is too academic. Everyone writes paper after paper discussing the same issue with new definitions, but NO ONE has come up with a plan to AVOID the behavioral issue which would be more advantage for the investor. Considering it is a sunk cost I think is the best behavioral move to protect against a behavioral issue, no? The problem with normal investing is you can't do that. You can't just go, "Well if I lose my whole retirement account who cares I'll just consider it a sunk cost". Here you can do and that makes it different. I know for SURE there will be a lot of second guessing going forward. It is NOT because the asset allocation is not sound (40/60 sp500/ LTT), but that it has NEVER been done using 3x leveraged funds, in a static asset allocation, and for long term investor.

If we have a 2008 there will be the feelings of: (a few and not comphrensive): 1. "Oh no I've lost so much in my retirement account then I need to liquidate this play account to save as much as I can before/ since I got fired", 2. "Oh no this plan is blowing up at 3x and I'm down a TON and not sure if they bleeding will ever stop", 3 "Oh no the plunge is so severe I wonder if the company is going to close the fund so better just liquidate everything now." Treating it as a sunk cost (IF you really believe it) and prevents all of the above and more.

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

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

Post by jaj2276 » Sat Feb 16, 2019 9:49 am

aj76er wrote:
Fri Feb 15, 2019 7:24 pm
FIREmeup wrote:
Fri Feb 15, 2019 5:14 pm
That being said I wouldn't buy or sell these ETNs ETFs without a limit price, like any stock because a large order can execute at weird prices but then get back to equilibrium within a half second.
This may be a valid reason to avoid M1 and use a discount brokerage like Fidelity or Schwab that allows you to trade these ETFs directly. I believe M1 executes all it's outstanding trades one day per week (starting at 9am CST) and then pushes them throughout the course of the day. In order to get fast enough execution, they are likely doing simple market orders.

...
I'm no M1 Finance evangelist although I am using M1 for this trade simply because I was 100% Vanguard and Vanguard doesn't allow levered ETFs. Also with fractional shares and free trading commissions, I won't have any cash drag (albeit minimal) and can decide to rebalance as often as I wish. I don't particularly like their website as it's designed to hide as much of the complexity from you as it can.

I just wanted to point out that M1 Finance assuredly does not do market orders. It also does not do all trades one day per week. It's one trading window per day (10-11 ET). They likely aggregate all their orders across all their user accounts, net those orders against each other, and then execute the remainders for each security in the open market over that 1 hr period. So if they have orders to buy 30k UPRO and sell 22k UPRO (those orders came in from their users since the end of last trading window), they'll go buy 8k UPRO and then transfer the 22k UPRO from the sellers to the buyers along with the 8k they bought in the open market. Both buyers and sellers will both buy and sell UPRO at whatever price M1 was able to achieve in buying those 8k shares. No sense in both buying 30k and selling 22k and paying 2 spreads (along with exchange costs, etc.). This netting reduces market impact substantially.

Furthermore, within that 1 hour period they'll use any number of algorithms to get you a representative price of that 1 hr period (VWAP, TWAP, participation %, etc.). I'm sure they execute on a variety of exchanges (lit, dark, ATSs, etc.) to avoid tipping their hand on what they're trying to do. If they do happen to have large orders for a given security (single stock or ETF), they'll call a variety of trading desks to ask for a 2-sided quote for X number of shares (again so as to not tip off whether they're buying or selling). This is a very competitive market so the trading desks that M1 Finance call will give very aggressive prices to win the business. If the market is .10 x .11 with 50k showing at the inside and M1 Finance (or any big broker/dealer) needs to transact 200k, they'll call up and say give me a 2-sided quote for 200k and the trading desks at the banks will respond back with something like .08 x .13. It would be up to M1 Finance to think whether they could transact in the open market themselves and get a better price than selling at .08 or buying at .13 when 50k is showing at both .10 and .11.

Understand that there is zero chance you're getting a better price than M1 Finance. Now you might get a better price because you happened to buy/sell at 9:58 or 10:38 or 2:19 and that price was lower/higher than the 1-hr representative price they achieved, but that's just chance. These are sophisticated trading operations behind these companies. I'll also point out that Vanguard, Fidelity, Schwab, etc., work much the same way when they're buying/selling the stock they need for inflows/outflows to their various mutual funds.

My worry about M1 Finance is the commingling of funds. Somewhat similar to MF Global MF Global Wikipedia. It doesn't seem like M1 Finance is even in the same business as MF Global but since I don't have anything to go on other than what M1 Finance tells me how they operate, there's always that chance that they'll eventually use customer's money for collateral as something else (they're not supposed to do that) and then when that something else comes due, M1 Finance customers become aggrieved M1 Finance creditors.

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

Post by jaj2276 » Sat Feb 16, 2019 10:09 am

Njm8845 wrote:
Sat Feb 16, 2019 1:12 am
Why not go 100% UPRO? If you’re willing to treat this as a lottery ticket, doesn’t that stand a better chance of reaching the $10M?
I answered someone else with this exact same question earlier in the thread. Here is my answer to his similar (if not exact) question. Why not go 100% UPRO?

Being able to rebalance from a lower returning investment into a higher returning investment adds a lot to a given trade. If you plug the two portfolios in Portfolio Visualizer you can even see that there are many days (stretching in to months and years) that if you needed/wanted to liquidate the portfolio, a 40/60 portfolio rebalanced would be higher (and sometimes much higher) than a 100% UPRO portfolio. And even when the 100% UPRO portfolio is higher it's not higher by much (especially considering how much debt holdings there are) due to rebalancing.

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

Post by EfficientInvestor » Sat Feb 16, 2019 10:12 am

finvestor wrote:
Sat Feb 16, 2019 8:17 am
UKFred wrote:
Sat Feb 16, 2019 2:35 am
finvestor wrote:
Fri Feb 15, 2019 7:06 am
Has anyone implemented (or considered implementing) this strategy in Europe? If so, which ETFs are you using? These days most europeans do not have access to US domiciled ETFs, so I was wondering if anyone knows good Europe domiciled ETFs to implement this strategy?
I am implementing this with 3UKL (leveraged FTSE 100) and 3GIL (leveraged gilts). I've run some basic tests over 1, 2 and 3 years (especially interested in the two sell-offs in 2018) and the strategy seems to work similar to the US ETFs. Of course these are in Sterling, not Euros.
Thanks for the input. I spent some time on Google and found these 2X leveraged ETFs listed in the German exchange:

Stocks: Xtrackers S&P 500 2x Leveraged Daily Swap UCITS ETF (ISIN LU0411078552)
Bonds: Lyxor Bund Daily (2x) Leveraged UCITS ETF (ISIN FR0011023654)

Any comments on such a combination to implement this strategy in Europe? The German long-term bonds are, I suppose, the classic "flight to safety" assets, so one might expect them to provide some protection when the broad stock market crashes?
WisdomTree has some leveraged products for Europe. 3USL is their 3X S&P500 fund and 3TYL is their 3X US 10 year treasury fund. Both are traded on the London exchange. 3USL has $20MM AUM, but 3TYL only has $900k AUM. Both funds seem to underperform UPRO and TYD, but not so much that it’s a deal killer.

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

Post by samsdad » Sat Feb 16, 2019 10:14 am

staythecourse wrote:
Sat Feb 16, 2019 9:32 am
samsdad wrote:
Sat Feb 16, 2019 8:47 am
If it’s a mental game to think of it as something outside my “investing” stay-in-the-lines AA, then I’m alright with that for now.
Considering it is a sunk cost I think is the best behavioral move to protect against a behavioral issue, no?
Couldn’t agree more. In my mind I just spent X dollars last week and “it’s gone.” If something becomes of it, great. If not, I suppose it was better to try and lose than to never try at all (with apologies to Lord Tennyson). Again, my plan still allows me to eat in 20ish years when I hope to retire. All things equal, I might might have to postpone that retirement date by a few months if this money goes nowhere (as opposed to going somewhere apparently in the unleveraged S&P fund(s) where it was going to reside).

Which brings up a good question: for those of you trying this, where’d the money come from? Was it in an S&P 500 allocation? TSM? Newly found cash?

Mine was sitting in IJR (S&P 600) only because that’s what I was mainly invested in at the Fidelity account this is running in.

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

Post by jaj2276 » Sat Feb 16, 2019 10:22 am

samsdad wrote:
Sat Feb 16, 2019 10:14 am
...

Which brings up a good question: for those of you trying this, where’d the money come from? Was it in an S&P 500 allocation? TSM? Newly found cash?

Mine was sitting in IJR (S&P 600) only because that’s what I was mainly invested in at the Fidelity account this is running in.
My wife's Roth IRA that had about 8 years of contributions. Since I aggregate all my accounts as a single portfolio, hers was sitting in roughly 50% Total Bond Admiral and 50% Small Cap Value. This weekend I'll remove this money from my AA and mark it as an alternative investment. It won't be a part of my investible AA (60/30/10) but will be a part of my NW and will be a part of an alternative AA (which includes equity, debt, gold along with real estate and alternative investments). This new RP fund isn't my first alternative investment and is currently about 1/8th the size of my biggest alternative investment. But in 20 years I hope it dwarfs it!

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

Post by gtwhitegold » Sat Feb 16, 2019 10:57 am

I would agree with others who have posted here that someone following a strategy like this will eventually need an exit strategy. At what point do you start to take money off of the table and move it to a more traditional glide path?

My first thought is to start at 60% of desired terminal wealth and go from there. Each time taking a chunk out of the leveraged portfolio and putting it into your more traditional portfolio, but never going below 20% since you can still use it as a somewhat uncorrelated asset to the rest of your portfolio.

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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 16, 2019 11:01 am

gtwhitegold wrote:
Sat Feb 16, 2019 10:57 am
I would agree with others who have posted here that someone following a strategy like this will eventually need an exit strategy. At what point do you start to take money off of the table and move it to a more traditional glide path?

My first thought is to start at 60% of desired terminal wealth and go from there. Each time taking a chunk out of the leveraged portfolio and putting it into your more traditional portfolio, but never going below 20% since you can still use it as a somewhat uncorrelated asset to the rest of your portfolio.
“Desired terminal wealth” is a funny concept.

I drew the line at $10M, but there are days I look at the 30 year backtest and think “$100M would be nice too”

😁

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

Post by gtwhitegold » Sat Feb 16, 2019 11:37 am

HEDGEFUNDIE wrote:
Sat Feb 16, 2019 11:01 am
gtwhitegold wrote:
Sat Feb 16, 2019 10:57 am
I would agree with others who have posted here that someone following a strategy like this will eventually need an exit strategy. At what point do you start to take money off of the table and move it to a more traditional glide path?

My first thought is to start at 60% of desired terminal wealth and go from there. Each time taking a chunk out of the leveraged portfolio and putting it into your more traditional portfolio, but never going below 20% since you can still use it as a somewhat uncorrelated asset to the rest of your portfolio.
“Desired terminal wealth” is a funny concept.

I drew the line at $10M, but there are days I look at the 30 year backtest and think “$100M would be nice too”

😁
Which reminds me of a quote attributed to the author of "Catch 22", Joe Heller.

https://medium.com/@bobsutton/kurt-vonn ... 31ca397888

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

Post by hohum » Sat Feb 16, 2019 11:46 am

I backtested a portfolio in portfoliovisualizer of VFINX (120%), VUSTX (180%), and cash (-200%). I think this would approximate the cost of financing the leverage. It still only goes back to 1978, and the years from 1982 forward are similar to what we already have in 1987-2018.

But here's the worst year, 1981:

stocks: -4.15%
bonds: 0.65%
cash: 14.72%

and when I put it all together I get -33.25% for the year. One would not intuit such a result given that stocks and bonds were basically flat ...

By the way, if I backtest this portfolio 1987-2018 I get 19.75%, which is not far off from what HEDGEFUNDIE had originally ... but it is less, due to financing the leverage at historical rates.

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

Post by gtwhitegold » Sat Feb 16, 2019 12:38 pm

hohum wrote:
Sat Feb 16, 2019 11:46 am
I backtested a portfolio in portfoliovisualizer of VFINX (120%), VUSTX (180%), and cash (-200%). I think this would approximate the cost of financing the leverage. It still only goes back to 1978, and the years from 1982 forward are similar to what we already have in 1987-2018.

But here's the worst year, 1981:

stocks: -4.15%
bonds: 0.65%
cash: 14.72%

and when I put it all together I get -33.25% for the year. One would not intuit such a result given that stocks and bonds were basically flat ...

By the way, if I backtest this portfolio 1987-2018 I get 19.75%, which is not far off from what HEDGEFUNDIE had originally ... but it is less, due to financing the leverage at historical rates.
Subtract a little over one percent for fund costs and trading fees and that should be what you should expect for your worst year, but in a high period of high interest rates, I would expect a possible slow death to a portfolio like this.

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

Post by Sola Scriptura » Sat Feb 16, 2019 12:46 pm

HomerJ wrote:
Sat Feb 16, 2019 2:58 am

I'm saying it's easy to just say "Oh, it's play money" right now. If it grows quite large, and you just let it ride, there WILL be some anxiety for most people (maybe not you, Mr. Cool as Cucumbers) :)

People anchor. If you have $600,000 in normal accounts, and your $10k play bet grows to $400,000, people are going to say "Hey, I'm worth a million dollars!" A smart move would be to take some risk off the table at that point. People WILL think about it, at least. It WILL be a source of some anxiety.

"Man, that's a huge chunk of my net worth riding on a bet".

If the risk shows up, and it drops to zero, very few people are going to say "Oh well, it was just $10k."
This is the rub for everyone who has decided to give the strategy a go regardless of the initial amount: As the value of the leveraged position increases--even if mentally you are treating it as if it does not exist and is not part of your overall portfolio allocation at all (or even its initial weight in your portfolio on the day you entered into the leveraged position)--so will the temptation to begin to deleverage. I think HEDGEFUNDIE himself has said earlier in the thread that as he watched his initial $100K become $6MM, it would be very tempting to cash out entirely, pump that $6MM into 30-year Treasuries, and call it a day (especially since the vast majority of his portfolio outside of this leveraged bet would presumably still be invested according to his IPS).

I'll probably be severely tempted even if it reaches levels below HEDGEFUNDIE's personal thresholds.

The bottom line is that each of us who have pulled the trigger are going to have to evaluate what the marginal utility of wealth looks like in each of our individual cases and then deleverage (or not) accordingly. If some of us have the nerves of steel to ride this thing out until a (hopefully) eventual $10MM position, come hell or high water, no matter how long it takes, then more power to these individuals!
Last edited by Sola Scriptura on Sat Feb 16, 2019 12:47 pm, edited 1 time in total.

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

Post by spefactor » Sat Feb 16, 2019 12:47 pm

I'm in for ~5% of my net worth. Should provide hours of entertainment watching the returns unfold (like a casino? 8-) )

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

Post by mrspock » Sat Feb 16, 2019 1:45 pm

HomerJ wrote:
Sat Feb 16, 2019 2:58 am
I'm saying it's easy to just say "Oh, it's play money" right now. If it grows quite large, and you just let it ride, there WILL be some anxiety for most people (maybe not you, Mr. Cool as Cucumbers) :)

People anchor. If you have $600,000 in normal accounts, and your $10k play bet grows to $400,000, people are going to say "Hey, I'm worth a million dollars!" A smart move would be to take some risk off the table at that point. People WILL think about it, at least. It WILL be a source of some anxiety.

"Man, that's a huge chunk of my net worth riding on a bet".

If the risk shows up, and it drops to zero, very few people are going to say "Oh well, it was just $10k."
For me at least, I will hit my “number” (not counting this investment) long before this grows into anything substantial, so that should reduce anxiety a bit. At that point it is just running up the score. In general though, I agree folks need to be mindful. I have had a single investment position (company stock) goto the moon (before I discovered Bogleheads), and it was critical to “stop playing the game” once the game was won.

My advice here would be if this rises to the point folks have “won their game”, i.e. enough to retire at age X (assuming some reasonable rate of return), they should stop, sell and restart with new money they are earning and lock in the win. If the worst happens, they could at least feel great about shaving years off retirement.

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

Post by Time2Quit » Sat Feb 16, 2019 2:05 pm

Call me crazy, but I am going to play this game even though I do not need to. I allocated 3 accounts with $30k in each account for the kids. The kids can have a nice little easter egg that they will discover in the will when we are gone.

It might be worth a lot or it might not be worth anything. Time will tell.
"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 HEDGEFUNDIE » Sat Feb 16, 2019 2:17 pm

hohum wrote:
Sat Feb 16, 2019 11:46 am
I backtested a portfolio in portfoliovisualizer of VFINX (120%), VUSTX (180%), and cash (-200%). I think this would approximate the cost of financing the leverage. It still only goes back to 1978, and the years from 1982 forward are similar to what we already have in 1987-2018.

But here's the worst year, 1981:

stocks: -4.15%
bonds: 0.65%
cash: 14.72%

and when I put it all together I get -33.25% for the year. One would not intuit such a result given that stocks and bonds were basically flat ...

By the way, if I backtest this portfolio 1987-2018 I get 19.75%, which is not far off from what HEDGEFUNDIE had originally ... but it is less, due to financing the leverage at historical rates.
Hohum, nice work.

There is an active effort to create a more accurate backtest in the other thread, but in the meantime, I will update my original post with this allocation, tweaked with a 0.1% monthly withdrawal to account for the ER.

https://www.portfoliovisualizer.com/bac ... on3_1=-200

The result is a 1987-2018 CAGR of 18.0%. The lower return is largely due to the cost of leverage (driven by high interest rates in the 80s & 90s), which in retrospect I do not believe was accounted for in the original backtest.

To be clear, the strategy still delivers 2x the returns of the S&P 500, and during low interest rate periods like we have had over the past 10 years, still delivers around 25% CAGR.
Last edited by HEDGEFUNDIE on Sat Feb 16, 2019 2:50 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 16, 2019 2:26 pm

Time2Quit wrote:
Sat Feb 16, 2019 2:05 pm
Call me crazy, but I am going to play this game even though I do not need to. I allocated 3 accounts with $30k in each account for the kids. The kids can have a nice little easter egg that they will discover in the will when we are gone.

It might be worth a lot or it might not be worth anything. Time will tell.
Right or wrong (probably wrong) I'm treating it the same way. I am on pace to have more then I will need in our lifetime so this money won't materially affect me, but am using it for my kid's lifetime (40+ years from now). If it becomes nothing not big deal (they just get stuck with what I leave over to them), but if it does anything close to what is suggested then we are talking a MAJOR difference in their financial lives.

BTW, I am using kids and charities interchangeable as I haven't figured out the split between the two as it is so far away.

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 16, 2019 2:34 pm

For some reason portfoliovisualizer only goes back to 1978 with long term treasuries, but it goes back to 1972 with intermediate term treasuries.

So I checked 1972-1981 for a portfolio that was tsm (120%), itb (180%), cash (-200%).

1972: 18.36
1973: -27.63
1974: -39.13
1975: 47.03
1976: 46.35
1977: -4.36
1978: -2.19
1979: 17.97
1980: 22.44
1981: -17.48

So one would have ended those ten years with a small gain in nominal terms. It's also quite clear that UPRO/TYD would have beaten UPRO/TMF in the really bad years of 1978-1981, where the TYD version would have ended with a small nominal gain of 16.58% whereas TMF would have been down 30% ... before some hellacious inflation.

I don't have ltb performance info for 1973 and 1974. It looks like yields moved from 5.95 to 6.46 to 6.99 so roughly the yield on ltb wouldn't have covered the capital loss, and the numbers for 1973 and 1974 would be somewhat worse.

It seems like nervous types would be better off with TYD than TMF, and accept the slightly lower average returns ... if the fear is a return to the 1970s ...

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

Post by HEDGEFUNDIE » Sat Feb 16, 2019 2:57 pm

hohum wrote:
Sat Feb 16, 2019 2:34 pm
For some reason portfoliovisualizer only goes back to 1978 with long term treasuries, but it goes back to 1972 with intermediate term treasuries.

So I checked 1972-1981 for a portfolio that was tsm (120%), itb (180%), cash (-200%).

1972: 18.36
1973: -27.63
1974: -39.13
1975: 47.03
1976: 46.35
1977: -4.36
1978: -2.19
1979: 17.97
1980: 22.44
1981: -17.48

So one would have ended those ten years with a small gain in nominal terms. It's also quite clear that UPRO/TYD would have beaten UPRO/TMF in the really bad years of 1978-1981, where the TYD version would have ended with a small nominal gain of 16.58% whereas TMF would have been down 30% ... before some hellacious inflation.

I don't have ltb performance info for 1973 and 1974. It looks like yields moved from 5.95 to 6.46 to 6.99 so roughly the yield on ltb wouldn't have covered the capital loss, and the numbers for 1973 and 1974 would be somewhat worse.

It seems like nervous types would be better off with TYD than TMF, and accept the slightly lower average returns ... if the fear is a return to the 1970s ...
How did you input the -200% Cash in PV's "Backtest Portfolio Asset Class Allocation" page? The cells don't seem to take negatives.

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

Post by hohum » Sat Feb 16, 2019 3:17 pm

HEDGEFUNDIE wrote:
Sat Feb 16, 2019 2:57 pm
hohum wrote:
Sat Feb 16, 2019 2:34 pm
For some reason portfoliovisualizer only goes back to 1978 with long term treasuries, but it goes back to 1972 with intermediate term treasuries.

So I checked 1972-1981 for a portfolio that was tsm (120%), itb (180%), cash (-200%).

1972: 18.36
1973: -27.63
1974: -39.13
1975: 47.03
1976: 46.35
1977: -4.36
1978: -2.19
1979: 17.97
1980: 22.44
1981: -17.48

So one would have ended those ten years with a small gain in nominal terms. It's also quite clear that UPRO/TYD would have beaten UPRO/TMF in the really bad years of 1978-1981, where the TYD version would have ended with a small nominal gain of 16.58% whereas TMF would have been down 30% ... before some hellacious inflation.

I don't have ltb performance info for 1973 and 1974. It looks like yields moved from 5.95 to 6.46 to 6.99 so roughly the yield on ltb wouldn't have covered the capital loss, and the numbers for 1973 and 1974 would be somewhat worse.

It seems like nervous types would be better off with TYD than TMF, and accept the slightly lower average returns ... if the fear is a return to the 1970s ...
How did you input the -200% Cash in PV's "Backtest Portfolio Asset Class Allocation" page? The cells don't seem to take negatives.
In the asset allocation backtest, I created a portfolio of 100% tsm, 100% itb, and 100% csh. I then looked at the annual returns, copied out to a spreadsheet, and calculated manually. Kind of a pain, but it is such an interesting strategy ...

I'll add something else.

Clearly the safest way to play this is something like 25% UPRO and 75% TYD. It is smooth, stable, does well in the 1970s (ends with a positive nominal return). What's the catch? Well you have own these 3x LETFs and at the end of the day you 'only' make 14%.

And the riskiest way to play it is 100% UPRO. Maybe you could buy put options to limit each year's drawdown to 50%, I don't know.

But if you put UPRO, TMF, TYD in the optimizer and use the Omega ratio with your desired return, it dials all this up and down quite nicely on a spectrum. There are solutions that look like what you have so your plan is "moderate risk" haha.

I'm still thinking what to think. Having lived through the 1970s even as a teenager, I have a visceral fear of the long bond. And Buffett trash talks it every chance he gets which weakens my resolve further.

As long as we are in the "new normal" with financial repression, UPRO/TMF looks like a winning trade. But how do we know if there's a regime change? Do we say "if the yield on the long bond goes over 5%, the world is not the same, switch to TYD?"

It's totally possible interest rates stay low Japan style for another 20 years, so I don't want 14% if I could get 18%. On the other hand, if yields on the long bond start going up every year .... Decisions, decisions.

Topic Author
HEDGEFUNDIE
Posts: 3650
Joined: Sun Oct 22, 2017 2:06 pm

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

Post by HEDGEFUNDIE » Sat Feb 16, 2019 3:22 pm

hohum wrote:
Sat Feb 16, 2019 3:17 pm
It's totally possible interest rates stay low Japan style for another 20 years, so I don't want 14% if I could get 18%. On the other hand, if yields on the long bond start going up every year .... Decisions, decisions.
18% is the blended CAGR across both high and low interest rate environments. If interest rates stay low, the CAGR is more like 25%. To me that is worth taking the bet.

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mrspock
Posts: 529
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

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

Post by mrspock » Sat Feb 16, 2019 3:24 pm

I wonder at what point do we begin getting calls from our brokers for holding these leveraged ETF positions :D. Schwab/Fidelity etc probably thinks we are the most boring/conservative investors ever created... and suddenly we are holding triple leveraged UPRO and TMF for months and maybe years...

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