Leverage Success Stories

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whodidntante
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Re: Leverage Success Stories

Post by whodidntante » Mon Sep 05, 2016 11:19 pm

Park wrote:
Do I still believe in leverage? Yes, and I intend to use it in the future.

The lesson I learned, and maybe others reading this thread will also, is to keep leverage moderate. In my case, I use margin, and intend to use no more leverage than will let me ride out a minimum 70% decline in my portfolio.
Thank you for sharing your experience and for your advice regarding amount of leverage.
Park wrote: However, futures may be less tax efficient than margin.
Taxes are a concern. IB limits the leverage via futures in an IRA account versus what could be accomplished in taxable, though the leverage they would allow me to do would still exceed what I would be willing to do.

Park
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Re: Leverage Success Stories

Post by Park » Sat Sep 10, 2016 1:35 pm

I've read that the most important question an investor faces is deciding how much to allocate to stocks and how much to bonds (asset allocation). Leverage is just negative bonds/cash: you're shorting bonds/cash. When one decides to lever, you're deciding your asset allocation.

A very conservative investor might want to have a high allocation to bonds. But even such a conservative investor would be unwise to have less than a 20% allocation to stocks. Bond allocations greater than 80% result in worse portfolios, and that's ignoring taxes.

A very aggressive investor might want to have high allocation to stocks. In the expectation of a positive equity risk premium, such an investor might decide to short bonds/cash; that means they're levered. But just as there is a limit as to how much going long on bonds can decrease risk , there is a limit on how much going short on bonds/cash can increase return. If you short bonds/cash enough, the volatility drag becomes too great, and you decrease your return.

IMO, there are two key points about being successful with leverage. First of all, use leverage only after learning the basics well. Secondly, use leverage moderately.

sean.mcgrath
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Re: Leverage Success Stories

Post by sean.mcgrath » Wed Feb 22, 2017 9:47 am

Park wrote:IMO, there are two key points about being successful with leverage. First of all, use leverage only after learning the basics well. Secondly, use leverage moderately.
Hi Park,
Do you have ways to quantify that? I have tried to do it in two ways: 1. at what leverage does a leveraged simulation always outperform an unlevered (the famous "stochastic," I suppose) and 2. what leverage always avoids a margin call.

I've run simulations on http://cfiresim.com/ at 150% stocks and -50% bonds for a thirty year horizon. The lowest result for the 150% is better than the lowest result for 100% or 70%, so I've achieved (simulated) stochastic dominance. 8-) However, in four cycles (out of 50+) the portfolio dips > 60%, which I would assume triggers a margin call. The worst case was a dip of 77%, which funny enough fits your 70% rule pretty well. I have no idea what drop would likely trigger a call during a market panic -- do you have data for this?

I'm thinking it could be fun to put money into an account for (eventual) grandchildren. 150% stocks would give 2.6X the expected return of 100%...

cheers,
Sean

EfficientInvestor
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Re: Leverage Success Stories

Post by EfficientInvestor » Tue Nov 27, 2018 2:40 pm

whodidntante wrote:
Sun Aug 28, 2016 11:24 am
How did you implement your leveraged portfolio, and what benefits did you realize? If you stopped, why did you stop? Post your success stories so we can learn from them.
I started a leveraged indexing portfolio a year ago in Nov 2017. The long term goal is to outperform the stock market by a factor of 2-3 while maintaining similar downside as the stock market. In other words, I'm aiming for a 20-30% CAGR and a max drawdown of -50%. Not the best results so far, but that's more due to the nature of the markets this year and not so much due to the leverage. I believe in the leveraged indexing concept and I'm sticking with it. My leveraged indexing concept is based around 2 rules:

1. Develop a diversified asset allocation that provides an optimal return/risk ratio.
2. Apply leverage, according to your risk tolerance, using the best source of leverage available.

In my opinion, a good starting point for Rule 1 is to develop an "all-weather" portfolio similar to that of the Ray Dalio variety. For the sake of simplicity and available data, let's use 35% S&P 500, 50% long term treasury, and 15% gold. Since 1987, this blend returned 8.3% CAGR with a max drawdown of -14.0%. Over this same time, the S&P returned 10.2% CAGR with max drawdown of -51%. This backtest was during a period of falling interest rates. Therefore, I don't necessarily expect this all-weather portfolio to continue to get 8% returns going forward. However, I would expect the all-weather diversified portfolio to remain a much more efficient investment in terms of sharpe ratio (return/risk).

Once a diversified asset allocation is determined, leverage can be applied per Rule 2. The first part of Rule 2 is to determine amount of leverage. I have a long investing horizon and can take on the risk of a potential 50% drawdown, similar to being in 100% stock. Therefore, if I would have used 3x leverage on this all-weather portfolio over the last 30 years, the max drawdown would have been -42% minus borrowing costs and volatility drag. Therefore, let's assume the max drawdown would have been somewhere around -50%.

The second part of Rule 2 is to determine your type of leverage. In my opinion, leveraged ETFs are currently the best form of leverage available due to ease of use, relatively low cost of use, and you never have to worry about margin calls. A 3x ETF version of the all-weather portfolio mentioned above would result in the following allocation:

35% UPRO, 50% TMF, 15% UGLD

You do have to contend with volatility drag due to the daily resetting of leverage. For instance, the volatility drag is definitely working against me this year as my current return is around -18.9% when the unleveraged version is around -4.1%. However, the daily resetting of leverage is actually a benefit in down years because the individual ETFs cannot lose more than 100% will likely be capped at a max loss around -90%. Also, in an up year, the daily resetting will lead to overperformance of the target. For instance, UPRO (SPY 3X) did 71.3% in 2017 while SPY did 21.3%. Therefore, UPRO overperformed 3X SPY for the year due to the daily resetting of leverage.

While these funds haven't been around beyond 2009, the daily data for their indexes or for mutual funds that track the indexes have been. Therefore, you can pull daily data for these indexes, perform daily 3X calculations, and create your own proxy funds at PortfolioVisualizer.com to show what the leveraged funds would have done in the past. For my daily calculations, I subtract 1%/250 to account for the expense ratio. That is 1% expense ratio split over 250 trading days in a year. Also, to account for dividends, I create a weighted average of the daily close value and daily adjusted close value (includes dividends) to find the right blend of the two that matches the actual performance of the leveraged ETF. I then compare my proxy fund to the actual fund over the time period the actual fund has been around. For example, here is my proxy TMF (portfolio 2) vs the actual TMF (portfolio 1):

Image

Once I create proxy funds that match the actual 3X ETF funds, I can apply the backtest further back in history. My limiting factor is how far back I can get daily data. In the case of S&P 500, long term treasury, and gold, I am able to go back to 1987. My 3X portfolio backtest to 1987, using the same 35/50/10 split, resulted in a CAGR of 21.0% and a max drawdown of -40.9% (in 1987). The max drawdown during 2008 was -38.8%. If you get a little more aggressive and use TQQQ (3X Nasdaq) instead of UPRO, the results are even better. Over the same time period a blend of 35% TQQQ, 50% TMF, 15% UGLD would have returned 29.3% CAGR with a max drawdown of -50.2%. So you would have had almost triple the return of the S&P with the same max drawdown. While this is all theoretical, I would still call it a "success story" that you may be interested in.

Please note that the allocations mentioned in this post are for illustration purposes. My actual portfolio is a blend of TQQQ (15%), RETL (10%), LABU (10%), DRN (15%), TMF (40%), and UGLD (10%). The data on some of these funds are limited and I can't backtest them as far. However, my overall concept is to use stock funds that generally have the highest returns (tech, consumer discretionary, and biotech as opposed to indexes like S&P 500 that include utilities and consumer staples) and use the bonds that do the best when stocks are doing poorly (long term bonds). Gold is included for protection against inflation and a REIT fund is included for additional diversification.

Carol88888
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Re: Leverage Success Stories

Post by Carol88888 » Tue Nov 27, 2018 2:59 pm

I used quite a lot of margin twice in my brokerage account. It allowed me to hold a much larger position in biotech stocks in '96 and '99. In fact, without taking that enormous risk I would not be where I am today.

But I came very close to being wiped out. There is no worse feeling than seeing the market start to go down and you owe Schwab $957,000. I am happy and grateful to have gotten out alive.

ThrustVectoring
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Re: Leverage Success Stories

Post by ThrustVectoring » Tue Nov 27, 2018 3:12 pm

Swelfie wrote:
Mon Aug 29, 2016 12:36 am
qwertyjazz wrote:Swelfie
I have read your posts with great interest in multiple threads and have pieced together some of the method you have used. But I was wondering if you were willing to write a longer post where you more explicitly lay out your investments and decision making process.

Thank you
QJ
Having been doing a lot of deep analysis on treasuries lately, I'm starting to trend towards Rob's method and lever up. In a straight up stock/bond split it really looks like your best sharpe ratio lives somewhere around 5/3/92 Equities/TIPS/Short Term Treasuries. The shorter the better it looks like but unfortunately for futures there is a floor at 2 years, and for ETFs (SHV and BIL) the low expense ratios become significant when measured against the returns. If you could lever 3 month treasuries to the max, the sharpe ratio is ridiculously high.

Unlike Rob, I don't use LTT at all. I'm really questioning whether they ever make sense. TIPS on the other hand seem to be a good asset uncorrelated to others. And I've done a lot of analysis and my portfolio is much more complex than Rob's to maximize uncorrelated assets.

Currently targeting:
2.3% S&P 500 (^ES)
2% Developed (^MXEA)
1% Emerging (^MXEF)
0.5% International Small Cap (VSS)
0.52% Momentum Tilt ETF (MTUM)
1.38% Value Tile (^RLV)
0.92% Mid Cap (^EMD)
0.63% Small Cap (^TF)
85% Short Term Treasuries (^ZT + I count my employer's 401k Stable Value fund as part of this)
5% TIPS (SCHP, or TIP in my TD Ameritrade HSA cuz it's no commission)
0.75% Commodities (DJ-AIGCI plus some Bitcoin and Etherium I have lying around the house. Might do some physical junk silver and a gold coin or two in here. Might even start rolling a short VIX contract. I figure if live cattle goes in this bucket, so does any random fun thing not expected to be correlated with the other stuff).

Did factor analysis on these with a huge correlation matrix. Using CAPE for expected equity returns, bond yield for bond returns, etc, etc to calculate a Std. Dev and two expected returns for the portfolio. Then a backtest gives me another pair. Mixing and matching std. dev and returns I get 6 possible sharpe ratios and corresponding kelly criterions. My most trusted for the portfolio are the calculated taking into account factors:

Est CAGR: 2.17%
Std. Dev: 1.57%
Sharpe: 0.989
Kelly Criterion: 63.13
Expected CAGR at Kelly Gearing: 49.5%

My method is to move my minimum leverage upwards monthly towards this 63.13x gearing, ever slower and slower, at a rate inversely proportional to the VIX and proportional to the distance to that number. If I am below my minimum leverage, I'll buy up to it. If I am above it, then my monthly contributions just buy down leverage. If any of the following is true, then I do not move my floor and I do not buy up to my floor:

VIX in backwardation (Market is melting)
VIX or VXV > 20 (Market is Panicking)
VXV:VIX ratio > 1.4 (Market is thinking about panicking)
US Unemployment higher than 12 month moving average (Market should be thinking about panicking)
Any point in the treasury yield curve inverted. (Money is being weird)

My leverage floor will never go above 30x because if it did, I would be at my goal notional value. 4 of my 6 Kelly Criterions are above this, so I'm pretty comfortable inching my way up there.

When I hit my target notional value, I will just buy down leverage with dividends and contributions from then on, slowly moving the portfolio towards a 60/40 one as the falling leverage reduces risk and retiring the futures and moving into ETFs as I can.

This is split between a brokerage account, Roth IRA, HSA, employer traditional and post tax traditional 401k and my own self directed 401k. All the futures are in the self directed 401k and the Roth IRA so I don't have to pay the capital gains. I'll probably self direct the Roth IRA soon because I forsee needing the room for more leverage (Interactive Brokers triples the margin requirements for IRAs but if I self direct I can use standard brokerage account). I might need to self direct the HSA if I can find a way to do that. I don't take on any actual debt in the 401k or IRA because of the unfavorable tax situation for that, but I could in a pinch, and with this much diversification and portfolio margin, I pretty much double my available funds available for margin. With this low of a std. dev. and the fact that my volatility is skewed to the positive, I just can't see maxing that out without going out above 60x leverage or so which I'm just not going to do, plus I'm contributing a great deal to this monthly. No model I can think to run can hurt this thing short of the market literally going to zero, in which case we are all screwed. I'm comfortable slowly ramping it up, and then slowly bringing it down. I'd ramp up to 25x or so faster but I really don't like this treasury environment so I'm camping down in the 5x range and following my slow ramp up plan. At my current leverage my expected returns are the same as a 100% equities portfolio but with more of the risk of a 60/40 portfolio, since really I'm about 50/450 Equities/STT.

Rob should have higher returns at the same gearing because he's got those long term treasuries and I sacrificed more return for more uncorrelated assets. My 5% TIPS are going to weigh me down unless inflation comes out of no where, but they really make this thing bulletproof in backtesting. (And someone needs to offer a TIPS future btw).
Excellent post, I'm surprised I've managed to miss this when I was researching up on a bunch of similar thoughts and analysis. Especially the part with a target notional value and then backing down leverage with new contributions/dividends afterwards, that all makes a bunch of sense to me.

I'm curious if you've looked into adding exposure to the "Bet Against Beta" factor. You're already in treasury futures and prefer levering up short-term contracts, so the full BAB implementation just adds shorting the longest duration contract available, so adding that in makes a bunch of sense to me. On the equity side, you'd probably be replacing equity index funds with low-volatility products (I haven't done the research to know which one makes the most sense here). You could do fancy stuff with stock screening, but that seems like way too much work and execution risk - grabbing more of a low-vol ETF to target the same risk level seems like it makes more sense to me.
Current portfolio: 60% VTI / 40% VXUS

hdas
Posts: 377
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Re: Leverage Success Stories

Post by hdas » Tue Nov 27, 2018 3:41 pm

Here's the treasury futures curve:

Code: Select all

December                                 March
Symbol     Quote  Volume   Symbol       Quote       Volume
ULA18	151-140	  486155   ULAH19	152-070	  401120   <--- 30 year
USA18	139-290	  673222   USAH19	139-090	  473121   <--- 20 year
TYA18	119-065	 2893808   TYAH19	119-025	 1925526   <--- 10 year
FVAZ8	112-262	 2763424   FVAH19	112-250	 2113015   <---  5 year
TUAZ8	105-140	 2021734   TUAH19	105-137	 1688236   <---  2 year
Stay the course and buy some more.

columbia
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Re: Leverage Success Stories

Post by columbia » Tue Nov 27, 2018 3:45 pm

Interesting thread.

I looked at UPRO in PV and the results were:

3 times as much volatility
Just under 3x return

What’s the expected drop of a UPRO, if the market drops 50%?

ThrustVectoring
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Joined: Wed Jul 12, 2017 2:51 pm

Re: Leverage Success Stories

Post by ThrustVectoring » Tue Nov 27, 2018 4:01 pm

hdas wrote:
Tue Nov 27, 2018 3:41 pm
Here's the treasury futures curve:

Code: Select all

December                                 March
Symbol     Quote  Volume   Symbol       Quote       Volume
ULA18	151-140	  486155   ULAH19	152-070	  401120   <--- 30 year
USA18	139-290	  673222   USAH19	139-090	  473121   <--- 20 year
TYA18	119-065	 2893808   TYAH19	119-025	 1925526   <--- 10 year
FVAZ8	112-262	 2763424   FVAH19	112-250	 2113015   <---  5 year
TUAZ8	105-140	 2021734   TUAH19	105-137	 1688236   <---  2 year
You're missing the 10-year ultra (TN). Also note that the cheapest-to-deliver bond for these contracts can be significantly shorter-term than the name implies, the 2-year treasury contract is more like 1yr9mo IIRC. And the 10-year contract TY has a cheapest-to-deliver bond that matures three years before the on-the-run bond does.

Best source for the treasuries futures market is here https://www.cmegroup.com/tools-informat ... ytics.html
Current portfolio: 60% VTI / 40% VXUS

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HomerJ
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Re: Leverage Success Stories

Post by HomerJ » Tue Nov 27, 2018 4:02 pm

columbia wrote:
Tue Nov 27, 2018 3:45 pm
Interesting thread.

I looked at UPRO in PV and the results were:

3 times as much volatility
Just under 3x return

What’s the expected drop of a UPRO, if the market drops 50%?
Well SSO (2x leverage) was around during the last crash, and it lost 80% at the bottom.

So 3x leverage would be down 90%+ I assume.
The J stands for Jay

scout1
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Re: Leverage Success Stories

Post by scout1 » Tue Nov 27, 2018 4:03 pm

@swelfie:

Are you leveraging up treasuries?

columbia
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Re: Leverage Success Stories

Post by columbia » Tue Nov 27, 2018 4:12 pm

HomerJ wrote:
Tue Nov 27, 2018 4:02 pm
columbia wrote:
Tue Nov 27, 2018 3:45 pm
Interesting thread.

I looked at UPRO in PV and the results were:

3 times as much volatility
Just under 3x return

What’s the expected drop of a UPRO, if the market drops 50%?
Well SSO (2x leverage) was around during the last crash, and it lost 80% at the bottom.

So 3x leverage would be down 90%+ I assume.
I too chicken to ever do something like this, but:

Standard 60/40 at 100K: lose 30k
20 UPRO/80 bonds: lose 18k

I guess that’s better? :)

EfficientInvestor
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Joined: Thu Nov 01, 2018 7:02 pm

Re: Leverage Success Stories

Post by EfficientInvestor » Tue Nov 27, 2018 4:29 pm

HomerJ wrote:
Tue Nov 27, 2018 4:02 pm
columbia wrote:
Tue Nov 27, 2018 3:45 pm
Interesting thread.

I looked at UPRO in PV and the results were:

3 times as much volatility
Just under 3x return

What’s the expected drop of a UPRO, if the market drops 50%?
Well SSO (2x leverage) was around during the last crash, and it lost 80% at the bottom.

So 3x leverage would be down 90%+ I assume.
Based on my backtests using calculations based on daily data, UPRO would have had a max drawdown of -95.7% and would have ended 2008 at -85.5% for the year. However, if you had been in a portfolio of 40% UPRO/50% TMF/10% UGLD, your max drawdown would have been -39.7% and would have ended 2008 at -8.7%. The max drawdown for this blend since 1987 would have been in 1987 and it would have had a max drawdown of -46.9%. Since 1987, this blend would have had a CAGR of 21.9%. Alternatively, if you had a blend of 40% TQQQ/50% TMF/10% UGLD over the same time period since 1987, CAGR would have been 30.8% and max drawdown of -58.7% during the tech crash.

EfficientInvestor
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Joined: Thu Nov 01, 2018 7:02 pm

Re: Leverage Success Stories

Post by EfficientInvestor » Tue Nov 27, 2018 4:47 pm

columbia wrote:
Tue Nov 27, 2018 4:12 pm
I too chicken to ever do something like this, but:

Standard 60/40 at 100K: lose 30k
20 UPRO/80 bonds: lose 18k

I guess that’s better? :)
Perhaps 50% VFSTX (short-term investment grade bond)/20% UPRO (3X S&P 500)/30% TMF (3X long term treasury)? Since 1987 (backtest based on calculations using daily index data), this would have resulted in a CAGR of 14.6% with a max drawdown of -29.6%. Over that same time period, a 60% VFINX (S&P 500)/40% VUSTX (long term treasury) blend would have resulted in a CAGR of 9.5% with a max drawdown of -27.0%. A blend of 20% UPRO/80% VUSTX would have resulted in a CAGR of 11.9% with a max drawdown of -29.4%. Bottom line....using leverage on a portfolio with a higher sharpe ratio provides better return for a given amount of drawdown.

Starfish
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Re: Leverage Success Stories

Post by Starfish » Tue Nov 27, 2018 4:57 pm

TMCD75 wrote:
Sun Aug 28, 2016 3:53 pm
Leverage is simply using other people's money to try and make yourself money. It's HUGE in the real estate business, in particular buying rental properties.

I've got a cousin in law, he bought 1.2 million dollars worth of apartments on leverage. He and his partner gave 200k down and then borrowed a cool million to finance the deal. He also is leveraged to the tune of probably another 300k-500k with this partner on other similar projects.

A while back he came to my house and we were talking about this leverage concept. He knew I had some mobey to invest and wanted me to play the leverage game. After drinking a 6 pack of beer together, I told him I'd rather not owe anyone hundreds of thousands of dollars.

I told him I was going to buy two rental houses straight out with cash. He did not like that at all. His point was I could buy 10 houses with the money I had at that time, but it would require lots of risk. What if we have another 2008, or just a recession about half that bad??? Folks with leverage are in dire straits at that point.
As long as your renter pay rent and you can meet your obligations, the value of the houses is irrelevant.
RE is a good investment only because of cheap leverage. Otherwise you should stick with index funds.

deltaneutral83
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Joined: Tue Mar 07, 2017 4:25 pm

Re: Leverage Success Stories

Post by deltaneutral83 » Tue Nov 27, 2018 5:09 pm

Starfish wrote:
Tue Nov 27, 2018 4:57 pm
As long as your renter pay rent and you can meet your obligations, the value of the houses is irrelevant.
RE is a good investment only because of cheap leverage. Otherwise you should stick with index funds.
I think that's the point. In a 40+% reduction in equities which is almost certain to happen over 25 years of your career, you're looking at tremendous vacancy and all the fun that comes with that (Locking in losses.... or worse). So putting 20% down, raising more cash to put 20% down on the next and so on, wash, rinse, repeating that as you go will likely come crashing down at some point for the overwhelming majority of people who get int he rental real estate game.

scout1
Posts: 18
Joined: Thu Oct 18, 2018 3:26 pm

Re: Leverage Success Stories

Post by scout1 » Tue Nov 27, 2018 5:11 pm

EfficientInvestor wrote:
Tue Nov 27, 2018 4:29 pm


Perhaps 50% VFSTX (short-term investment grade bond)/20% UPRO (3X S&P 500)/30% TMF (3X long term treasury)? Since 1987 (backtest based on calculations using daily index data), this would have resulted in a CAGR of 14.6% with a max drawdown of -29.6%. Over that same time period, a 60% VFINX (S&P 500)/40% VUSTX (long term treasury) blend would have resulted in a CAGR of 9.5% with a max drawdown of -27.0%. A blend of 20% UPRO/80% VUSTX would have resulted in a CAGR of 11.9% with a max drawdown of -29.4%. Bottom line....using leverage on a portfolio with a higher sharpe ratio provides better return for a given amount of drawdown.
The risk is inflation. Inflation hurts both stock and bonds at the same time, plus you're levered. In your backtests interest rates have only gone down which has helped both stocks and bonds. Hedging against inflation costs money since commodities and TIPs generally earn nothing or worse.

EfficientInvestor
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Re: Leverage Success Stories

Post by EfficientInvestor » Tue Nov 27, 2018 5:30 pm

scout1 wrote:
Tue Nov 27, 2018 5:11 pm
The risk is inflation. Inflation hurts both stock and bonds at the same time, plus you're levered. In your backtests interest rates have only gone down. Hedging against inflation costs money since commodities and TIPs generally earn nothing or worse.
That is why I include some exposure to gold in my portfolio. For instance, look at the backtest at the link below. This is a 10 year backtest beginning in 1972. 10-year treasury rates almost tripled during this 10-year period (rose from 5.9% at beginning of 1972 to 14.5% at end of 1981). A blend of 40% S&P 500/50% 10-year treasury/10% gold returned a CAGR of 8.0% (0.6% below inflation) with a max drawdown of -14.6%. In this same period, the S&P returned a CAGR of 6.0% (2.5% below inflation) with a max drawdown of -44.9%.

If the 40/50/10 had a 3x leverage applied during this time period, my assumption is that the max drawdown would be somewhere around the same -45% mark as the S&P 500. Let's call it -50% to be conservative. The CAGR would have been somewhere in the neighborhood of 20% (8% x 3 minus expense ratio and volatility drag). This would have outpaced inflation by a good margin while maintaining similar drawdown to an all-stock portfolio. I don't have daily data going back that far, so I can't know for sure. But it would have been somewhere in the neighborhood of 20% CAGR. (Note that I used 10-year bond instead of long term bond because the data goes back further in PV for the 10-year)

https://www.portfoliovisualizer.com/bac ... 0&Gold1=10

hdas
Posts: 377
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Re: Leverage Success Stories

Post by hdas » Wed Dec 05, 2018 10:16 pm

It's peculiar that most ETF offerings are to leverage high vol things instead of leveraging low vol things. :greedy
Stay the course and buy some more.

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