I don't think anyone disagrees with you. Here's ULPIX (2x S&P 500) vs. VFINX (Vanguard's 500 fund) since 1998:dave_k wrote: ↑Sat Mar 02, 2019 6:10 pm I get that real return distributions are not the same as a normal distribution, and that when they looked at INDU over the long period they were considering, they found that the positive effects of compounding outweighed the negative effects of volatility. However, in the simulated data we have for UPRO over the last 30 years (as real as any data they used apparently), relative to the S&P 500 returns, that unfortunately does not hold true.
I wish we could link to PV charts using the simulated data, but it's easy to load for anyone that's interested. Maybe I'll post some screenshots later. To illustrate this point, in every case where the S&P 500 returned to a balance it had at a previous time, whether it was up or down in between, the UPRO simulation was lower. If there was no volatility drag, UPRO would be the same. There were definitely periods of sustained growth where 3x was exceeded, but there were also periods (long ones) where it was not only worse than 3x, but worse than 1x, or even went down while the S&P 500 went up overall. Again, UPRO was actually a bit under 1x the S&P 500 over the whole period. Even if you cherry-pick Dec 87 as a starting point (giving it the best chance by buying at a big drop), it's still under 3x overall, and even though it does over 3x from there to 2001, it's back down to just over 1x in 2002, and down to 1/3x in 2009. I think the very long term INDU (and other) returns the paper considered may paint a rosier picture than we can expect of UPRO in the coming few decades, but maybe I'm wrong.
That said, rebalancing with TMF saves the day in this strategy (over the simulation period anyway), apparently taking advantage of a lot of the big gains in UPRO (and some in TMF) while significantly mitigating the losses either would have alone (especially UPRO). We're banking heavily on the rebalancing continuing to work like this, and not so much on 3x leveraged funds having more positive compounding than volatility drag (which they have not overall in the past few decades).
https://www.portfoliovisualizer.com/bac ... ion2_2=100
I guess I was just trying to point out that abstract math doesn't apparently work here vs. the real historical returns, due to non-normal distributions in the real world, at least according to the authors of this paper. And, no, I wouldn't be surprised to find that in some market conditions, even the 40/60 UPRO/TMF will underperform the 1x S&P 500 for awhile, perhaps decades. That's why I said upthread that this might be my gift to my daughters vs. a bonus for my wife and I in 20 years.
That said, and taking your lead, let's look at the data set we have publicly available for now, the HEDGEFUNDIE revised data set currently in the OP. Let's take the case of Bob, the laughably inept world's worst market timer, who only invested at the market peaks, except this time, he's invested in this project.
Bob lump-summed his money into the market at the then-peak at the end of August, 1987. Little did he or anyone else know that a little over six weeks later, on Monday, October 19th, the Dow Jones Industrial Average would experience the single biggest one-day decline in history, a record that stands to this day (-22.61%). Let's look at the Black Monday period from the beginning of September, 1987 (the peak) to December, 1990 (so we can see the detail of the market movements) comparing the 40/60 3X portfolio vs the Vanguard 500:
A bumpy ride to be sure. Indeed:
Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. in December 1987, and collectively predicted that "the next few years could be the most troubled since the 1930s".
Notice that the lowest of the low was hardly lower than the Vanguard 500 investor. Let's say Bob stayed the course, despite the eminent economists' prognostications, until the next market peak before a large draw down (August, 2000). How did Bob fare?
Bob, by now feeling like the smartest guy in the room, invested a new tranche of money into the market at the end of Aug, 2000, the then market peak. He'd be rewarded for his prescience by a market that wouldn't stop basically going straight down for two years:
His 40/60 3X portfolio would return his money sometime early January, 2004. The Vanguard 500 investor wouldn't see their money returned to them before the next downturn. The closest they'd get would be Halloween, 2007, when their $10k would be, inflation adjusted, $9446.
On Halloween 2007, Bob dressed up as a zillionaire. Feeling great--and looking even better in his outfit--he again invested another fistful of dollars the next trading day. For the next 14 months or so, the market tried to shake Bob's confidence as it wouldn't stop dropping. This time period would become known as the Great Recession, of course. How'd Bobby do?
Bob let it ride till the end of last December, when he finally retired. How'd that last tranche do?
Keep in mind of course that this is based on the best simulated data that's been made available to us. It is still being worked on in that other thread. But if the data is even somewhat close, it shows me that Bob made it through the last three biggest downturns in the last 31 years and was no worse for wear than the Vanguard 500 investor. What will the next downturn do to this portfolio vs. the 500? I have no idea, but I am somewhat, maybe a little reassured, that even if I unwittingly bought at the market peak a few weeks ago, I might still have a chance of eventually outperforming the 500 in the next few years.