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

[Forester]

Did leveraged US bonds pair well against leveraged Developed ex-US (flight to senior currency effect?).

[jaj2276]

I hope that the day of reckoning for this strategy comes early so that I can either a) give up once I realize I can't stomach the losses or b) watch the rebalanced portfolio scream to new highs.

[MotoTrojan]

Did leveraged US bonds pair well against leveraged Developed ex-US (flight to senior currency effect?).

DZK, the 3x developed fund, has a mystery 3% annual drag. No thanks.

[rascott]

Looking through our 401ks at Fidelity (Brokerage Link)....I can purchase PIMCO Stock Pls funds (Absolute Return and Intl Dollar Hedged).

Both I3 and A class are available. The I3 have 0.25% less mgmt fees....but I'd pay a transaction fee of $50 initial and $5 recurring for auto invest. For lump sum moves seems clear the best option would be to pay the $50....but does paying $5/contribution make sense? This amounts to over a 1% load charge on each buy.

Have never bought anything but no load index mutual funds so really have never bothered to understand how to best calculate it. Would one be better to have contributions just ongoing into the no-fee class shares, and then occasionally do conversions to the I3 class? Even the A class shares with the higher mgmt fee have done well against the index, and understanding them now, no reason to think that wouldn't continue.

[Forester]

Thinking of doing this, options are limited, no long-term bond product. Only a couple of UK platforms offer these leveraged ETFs in tax free savings accounts.

Rebalance quarterly

- 40% 3xS&P 500
- 50% 3xUS 10yr
- 10% US 20yr unleveraged (to lock in gains)

If the US unemployment is above the 12mo m.a. at the quarterly check, S&P exposure trimmed to 30%.

[MotoTrojan]

Thinking of doing this, options are limited, no long-term bond product. Only a couple of UK platforms offer these leveraged ETFs in tax free savings accounts.

Rebalance quarterly

- 40% 3xS&P 500
- 50% 3xUS 10yr
- 10% US 20yr unleveraged (to lock in gains)

If the US unemployment is above the 12mo m.a. at the quarterly check, S&P exposure trimmed to 30%.

To lock in gains? Not sure I follow what that means. I think this approach is reasonable though. I'd recommend you download the Simba spreadsheet and play around with things. Even using 40% UPRO (3x S&P500) and 60% unleveraged 10yr had decent results, and did MUCH better during 1955-1982. This is not risk parity of course but still can be efficient. 40% S&P500 and 60% 3x 10yr would be a good compromise.

You can find the spreadsheet with leveraged funds here: It only allows annual rebalancing but goes back to 1955 so it is good for spot-checks and comparing allocations: https://drive.google.com/open?id=16ORud ... WfTP-0FggA

What ETFs are you looking at for your 2 leveraged options?

[elderwise]

Everyone is saying doing this with taxable money will be paying a lot of short term gains but TBh wth I see my test 1000$ has been giving 10% return in 1 month so if someone invests 100K or 300K and gets 30% return as seen by OP over six months why would you worry or be shy of paying good amount of STCG taxes aren't tax part of life here in USA.

A doctor making 500K sure pays more taxes than a professional that makes 60K or 80K but that's just how our system is.

What do you guys think, I am just posing an open question here if you me all of us who are happy with returns so far why would you hesitate doing in taxable ( I do realize tax deferred is ultimately better but not everyone has or can do it in those vehicles) some may only have a large maturing CD or sudden inheritance money.

I would happily pay more taxes if I can make 30% in 1 year on any amount !! Or even 20% for that matter lol.

[firebirdparts]

You do have to guard against that level of fanaticism where tax avoidance becomes earnings avoidance. It’s very common.

[keanoz]

Just jumped into ntsx because I only have a taxable. Thanks for the info

[mickens16]

How are people implementing NTSX into this strategy?

[elderwise]

Just jumped into ntsx because I only have a taxable. Thanks for the info

Why can't you do upro/tmf 40/60? I am doing the same I'm taxable in M1...?

Why is ntsx better than upro/tmf?

[keanoz]

Just jumped into ntsx because I only have a taxable. Thanks for the info

Why can't you do upro/tmf 40/60? I am doing the same I'm taxable in M1...?

Why is ntsx better than upro/tmf?

I was going to do that but most people seem to agree that the tax burden to re balance quarterly would be a burden. Thus, I figured I could re balance with new money, however this would also get out of hand.

[elderwise]

Just jumped into ntsx because I only have a taxable. Thanks for the info

Why can't you do upro/tmf 40/60? I am doing the same I'm taxable in M1...?

Why is ntsx better than upro/tmf?

I was going to do that but most people seem to agree that the tax burden to re balance quarterly would be a burden. Thus, I figured I could re balance with new money, however this would also get out of hand.

Assuming you make the millions which we all are hopeful for..keep on

[elderwise]

Am doing this purely in taxable initially 1K maybe future 50K 100K and to reduce burden on gains short term.limit to annual rebalance.

[Lee_WSP]

Everyone is saying doing this with taxable money will be paying a lot of short term gains but TBh wth I see my test 1000$ has been giving 10% return in 1 month so if someone invests 100K or 300K and gets 30% return as seen by OP over six months why would you worry or be shy of paying good amount of STCG taxes aren't tax part of life here in USA.

A doctor making 500K sure pays more taxes than a professional that makes 60K or 80K but that's just how our system is.

What do you guys think, I am just posing an open question here if you me all of us who are happy with returns so far why would you hesitate doing in taxable ( I do realize tax deferred is ultimately better but not everyone has or can do it in those vehicles) some may only have a large maturing CD or sudden inheritance money.

I would happily pay more taxes if I can make 30% in 1 year on any amount !! Or even 20% for that matter lol.

I'm fine with paying taxes, it's just annoying to have a tax drag if it's not money I need right now, but c'est la vie. First world problem.

Also, both the doctor and the professional are paying the exact same amount of taxes (pre deduction) on that 60-80k. The doctor only pays more on the additional 420k.

[HEDGEFUNDIE]

Everyone is saying doing this with taxable money will be paying a lot of short term gains but TBh wth I see my test 1000$ has been giving 10% return in 1 month so if someone invests 100K or 300K and gets 30% return as seen by OP over six months why would you worry or be shy of paying good amount of STCG taxes aren't tax part of life here in USA.

A doctor making 500K sure pays more taxes than a professional that makes 60K or 80K but that's just how our system is.

What do you guys think, I am just posing an open question here if you me all of us who are happy with returns so far why would you hesitate doing in taxable ( I do realize tax deferred is ultimately better but not everyone has or can do it in those vehicles) some may only have a large maturing CD or sudden inheritance money.

I would happily pay more taxes if I can make 30% in 1 year on any amount !! Or even 20% for that matter lol.

You do have to guard against that level of fanaticism where tax avoidance becomes earnings avoidance. It’s very common.

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

[MoneyMarathon]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

[LocusCoeruleus]

We need triceratop's tax efficiency spreadsheet so folks can calculate the ongoing "tax burden"

For folks who are already investing $100k or less in a taxable portfolio every year, I still don't see how the "add to the fund that is down" is a big burden for less than $1mm portfolio.

[HEDGEFUNDIE]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

[LadyGeek]

We need triceratop's tax efficiency spreadsheet so folks can calculate the ongoing "tax burden"

Here you go: 2017 Relative Tax Efficiency

[MoneyMarathon]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

[HEDGEFUNDIE]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

[MoneyMarathon]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

We're not at 4.5% today, dude.

[MotoTrojan]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

[HEDGEFUNDIE]

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

And why can’t UPRO continue to do it for the next 10 years?

[MoneyMarathon]

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

Edit: sorry, misread who I was replying to. Oops.

Starting in 1982 is an amazing start point for the 60% TMF allocation. Starting with 4.5% ten years ago was also quite good, as you noticed. Even starting at 2.3% today might be okay.

But it will not be as good as starting in 1982.

[HEDGEFUNDIE]

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

We're not at 4.5% today, dude.

That’s right, we’re at 2.3%. So we have at least another 2.3% to fall!

[schismal]

In the long run ('82-'18) the strategy returns 20% CAGR at 28% annual volatility.

If you had to pay tax cost, let's just assume that cuts the CAGR down to 15%, still with 28% volatility.

The S&P returned 11% over the same time period, at 15% volatility.

At that point the risk-reward just isn't worth it.

20% CAGR over 25 years takes 100k to 10M. Assuming the highest income bracket and state tax of 12.3%, you keep 6.8M.

11% CAGR over 25 years takes 100k to 1.5M. Assuming the same tax situation, you keep 1M.

I'm doing this in my Roth (which is unquestionably the better vehicle), but I also started a 1k experiment in my taxable. I do think this fear is a bit overstated, especially for small taxable allotments. But everyone's risk tolerance differs.

[HEDGEFUNDIE]

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

No deflection. Starting in 1982 is an amazing start point for the 60% TMF allocation. Starting with 4.5% ten years ago was also quite good, as you noticed. Even starting at 2.3% today might be okay.

But it will not be as good as starting in 1982.

I'm just amazed that anyone still has to point this out to you.

Your statements are in clear contradiction of the facts.

The ‘09-‘19 CAGR is much higher than the ‘82-‘18 CAGR.

[MotoTrojan]

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

And why can’t UPRO continue to do it for the next 10 years?

Of course it can, but to get 20% CAGR over the next 37 years with equity returns similar to the past 37 years you are thinking wishfully, can we agree on that at-least?

[MoneyMarathon]

I dispute Kevin’s math, as well as his implications for this strategy.

Where were long term rates 10 years ago? And how has the strategy done since then?

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

We're not at 4.5% today, dude.

That’s right, we’re at 2.3%. So we have at least another 2.3% to fall!

Yes, I am allowing that you get everything your heart desires from bonds. They do what you want.

But you still won't get 1982-2018 returns out of them.

[MoneyMarathon]

The ‘09-‘19 CAGR is much higher

No bear market for stocks from 2009 to 2019.

I don't want this thread locked... maybe later I will come up with some numbers for you, and a more detailed explanation, if that helps.

[HEDGEFUNDIE]

The ‘09-‘19 CAGR is much higher

No bear market for stocks from 2009 to 2019.

I don't want this thread locked... maybe later I will come up with some numbers for you, and a more detailed explanation, if that helps.

Why does everyone forget we just had a bear market at the end of 2018.

What is the 12 month return on the strategy, with a bear market smack in the middle? 32% CAGR

[HEDGEFUNDIE]

What's there to dispute? I am suggesting a completely golden scenario where bonds do whatever you want. Negative correlation, stay in a range from 0% to 2%, go to 0% at the end of the time period. How in the world can you hope to juice it up to the historical returns 1982-2018? Do you actually not get that a lower, say 4x forward return for 60% TMF is actually considering a scenario that's all roses and sunshine?

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

And why can’t UPRO continue to do it for the next 10 years?

Of course it can, but to get 20% CAGR over the next 37 years with equity returns similar to the past 37 years you are thinking wishfully, can we agree on that at-least?

Why would I agree with that?

US stock market returns since the 1920s, with a dozen recessions baked in, is 9% CAGR.

[NMBob]

Hypothetical example: stocks up 40 percent, long bond down 20 percent. started with 100kupro/150ktmf. upro grows to 140 and tmf drops to 120. you made $10k total. For rebalance you need to have 156k in tmf so you sell $36k of upro to buy tmf. now the question is, at what price did you buy those upro share lots and how long ago (long term cg rate?) and that could be many different situations years down the road.

but, lets proceed as if this was held a year from initial purchase, so 1st and its annual rebalance, and assume pay 15 percent long cap gains tax on this. The 40 percent gain in each share of the 36k sold, is $14.4k gains. tax is $2.16k on that so that is about 22 percent instead of 15 % lcg tax rate paid.

Now, the next year if the gains and losses were reversed for upro and tmf that year, you could sell some specific lot original purchased tmf , and not the newer ones, which perhaps has just rebounded to about its original price for little capital gains tax.

So perhaps the worse thing is for one side to just go up and up and up.

If tax is an issue, Are there tax loss harvesting substitutes that are close enough to do it with and thus possible ok to have to stick with? From above hypothetical, sell some, tmf long loss to offset the upro sell gain, and buy some maybe tyd 3x mid treasuries, and/or some 2x longs for 30 days (or more)? Nasdaq TQQQ for upro etc?

So is tax loss harvesting between two different sets of accepted stock/bond etfs feasible solution? And if so, is taxable then likely better than traditional IRA?

[HEDGEFUNDIE]

Hypothetical example: stocks up 40 percent, long bond down 20 percent. started with 100kupro/150ktmf. upro grows to 140 and tmf drops to 120. you made $10k total. For rebalance you need to have 156k in tmf so you sell $36k of upro to buy tmf. now the question is, at what price did you buy those upro share lots and how long ago (long term cg rate?) and that could be many different situations years down the road.

but, lets proceed as if this was held a year from initial purchase, so 1st and its annual rebalance, and assume pay 15 percent long cap gains tax on this. The 40 percent gain in each share of the 36k sold, is $14.4k gains. tax is $2.16k on that so that is about 22 percent instead of 15 % lcg tax rate paid.

Now, the next year if the gains and losses were reversed for upro and tmf that year, you could sell some specific lot original purchased tmf , and not the newer ones, which perhaps has just rebounded to about its original price for little capital gains tax.

So perhaps the worse thing is for one side to just go up and up and up.

If tax is an issue, Are there tax loss harvesting substitutes that are close enough to do it with and thus possible ok to have to stick with? From above hypothetical, sell some, tmf long loss to offset the upro sell gain, and buy some maybe tyd 3x mid treasuries, and/or some 2x longs for 30 days (or more)? Nasdaq TQQQ for upro etc?

So is tax loss harvesting between two different sets of accepted stock/bond etfs feasible solution? And if so, is taxable then likely better than traditional IRA?

You only get 3k/yr in net TLH benefit.

[NMBob]

Hypothetical example: stocks up 40 percent, long bond down 20 percent. started with 100kupro/150ktmf. upro grows to 140 and tmf drops to 120. you made $10k total. For rebalance you need to have 156k in tmf so you sell $36k of upro to buy tmf. now the question is, at what price did you buy those upro share lots and how long ago (long term cg rate?) and that could be many different situations years down the road.

but, lets proceed as if this was held a year from initial purchase, so 1st and its annual rebalance, and assume pay 15 percent long cap gains tax on this. The 40 percent gain in each share of the 36k sold, is $14.4k gains. tax is $2.16k on that so that is about 22 percent instead of 15 % lcg tax rate paid.

Now, the next year if the gains and losses were reversed for upro and tmf that year, you could sell some specific lot original purchased tmf , and not the newer ones, which perhaps has just rebounded to about its original price for little capital gains tax.

So perhaps the worse thing is for one side to just go up and up and up.

If tax is an issue, Are there tax loss harvesting substitutes that are close enough to do it with and thus possible ok to have to stick with? From above hypothetical, sell some, tmf long loss to offset the upro sell gain, and buy some maybe tyd 3x mid treasuries, and/or some 2x longs for 30 days (or more)? Nasdaq TQQQ for upro etc?

So is tax loss harvesting between two different sets of accepted stock/bond etfs feasible solution? And if so, is taxable then likely better than traditional IRA?

You only get 3k/yr in net TLH benefit.

Sorry, but I am not for sure what you are trying to say. I think you have confused using annual excess cg loss to offset regular income, which has a 3k limit. That possible ice cream on the cake is not really relevant to solving the tax issue. I do not think there any limits in using short/Long sale losses to offset s/l sale gains , $ per $, in the same year which is what I am proposing.

separately, one scenario could be if stock makes a lot and a lot , and the bonds somewhat unchanged instead of a significant loss, there is no tax loss to offset gain with...ugh ....

[MotoTrojan]

10 years ago the 30 year Treasury was at 4.5%. Today it is at 2.3%. And the strategy returned 29% CAGR over those 10 years.

So explain to me again why a 20% forward looking CAGR is impossible?

I'm continuously more and more confused at your deflections. How did UPRO alne do over those 10 years?

And why can’t UPRO continue to do it for the next 10 years?

Of course it can, but to get 20% CAGR over the next 37 years with equity returns similar to the past 37 years you are thinking wishfully, can we agree on that at-least?

Why would I agree with that?

US stock market returns since the 1920s, with a dozen recessions baked in, is 9% CAGR.

If equity returns are the same as they have been in the last 37 years, I would say it is nearly certain that the returns of this strategy will not be. No? Treasuries just don't have enough ammo.

[MotoTrojan]

The ‘09-‘19 CAGR is much higher

No bear market for stocks from 2009 to 2019.

I don't want this thread locked... maybe later I will come up with some numbers for you, and a more detailed explanation, if that helps.

Why does everyone forget we just had a bear market at the end of 2018.

What is the 12 month return on the strategy, with a bear market smack in the middle? 32% CAGR

LOL... I give up.

[physixfan]

This is an interesting read: https://www.deshaw.com/assets/articles/ ... 0208_1.pdf

The most important assumption of HEDGEFUNDIE's strategy is that SP500 and Long Term Treasury has negative correlation. This market insight published by D. E. Shaw confirmed this negative correlation in the post-2000 era and proposed an explanation to why it is negative. It seems by their theory we can still have a negative correlation as long as the FED can do a successful job controlling the inflation rate at ~2%.

[MotoTrojan]

This is an interesting read: https://www.deshaw.com/assets/articles/ ... 0208_1.pdf

The most important assumption of HEDGEFUNDIE's strategy is that SP500 and Long Term Treasury has negative correlation. This market insight published by D. E. Shaw confirmed this negative correlation in the post-2000 era and proposed an explanation to why it is negative. It seems by their theory we can still have a negative correlation as long as the FED can do a successful job controlling the inflation rate at ~2%.

It actually relies on uncorrelation but negative is even better.

[DriftWood]

What's the CAGR of 60/40 TMF/UPRO during the period of 1982 to 1998 when the correlation between 10 year Treasury and SP500 is positive?

[HEDGEFUNDIE]

What's the CAGR of 60/40 TMF/UPRO during the period of 1982 to 1998 when the correlation between 10 year Treasury and SP500 is positive?

30%

[Hydromod]

I think of the market as experiencing climate and weather. Climate is multiyear trends and weather is the shorter volatility.

I think the strategy return is more due to taking advantage of climate (long term LTT returns) than mitigating weather (inverse correlation to smooth volatility). Periods with good tailwinds and positive correlation do well (1982 to 1998). Periods with headwinds and negative correlation do poorly (1970 to 1982). Periods with good tailwinds and negative correlation do well and are smoother rides.

Yes, there's substantial benefit in the low or negative correlation. But I'd say overall performance is more usefully described as stemming from consistent LTT returns, goosed by equities.

Just my opinion.

[physixfan]

What's the CAGR of 60/40 TMF/UPRO during the period of 1982 to 1998 when the correlation between 10 year Treasury and SP500 is positive?

30%

I only have data since 1986 (from you). It seems the performance of this strategy is just so so during the period of 1986-2000. Note the Sharpe ratio compared to just SP500.


The performance from 2000 to today is much much more impressive (in terms of Sharpe ratio compared to just SP500).

[stipeman]

Has anyone looked at the Small Cap Stocks Plus fund (PSCSX). It's crushed the straight Russell index....why would their bond strategy do so much better than the SP500 index funds, like the original Stocks Plus?

PSCSX's outperformance was all in the early years. Since mid-2010 it has basically matched the unleveraged index.

https://www.portfoliovisualizer.com/fun ... F01%2F2011

I was comparing it to the Russell...since that's what it tracks.

https://www.portfoliovisualizer.com/bac ... total3=100

It's a shame PIMCO chose the obviously inferior small cap index, I guess they are a bond shop after all.

Agreed....but don't think they have an option.... believe you can only buy futures on the Russell. So blame CME for not giving us a better product

Just found it odd that the bonds bosted returns so much over the index of that fund....but not the original Stocks Plus fund. Would assume they used the same bond strategy with both, guess not.

Explained in this link:
https://www.pimco.com/en-us/insights/in ... 02299831=1

[MotoTrojan]

PSCSX's outperformance was all in the early years. Since mid-2010 it has basically matched the unleveraged index.

https://www.portfoliovisualizer.com/fun ... F01%2F2011

I was comparing it to the Russell...since that's what it tracks.

https://www.portfoliovisualizer.com/bac ... total3=100

It's a shame PIMCO chose the obviously inferior small cap index, I guess they are a bond shop after all.

Agreed....but don't think they have an option.... believe you can only buy futures on the Russell. So blame CME for not giving us a better product

Just found it odd that the bonds bosted returns so much over the index of that fund....but not the original Stocks Plus fund. Would assume they used the same bond strategy with both, guess not.

Explained in this link:
https://www.pimco.com/en-us/insights/in ... 02299831=1

Wow, this is worth a further look. May be worth considering this fund in place of the S&P500 based ones.

In a nutshell the R2K is much more illiquid and it is more difficult to short individual stocks; this premium paid by those shorting results in futures (borrowing) costs that are usually below libor, boosting the potential outperformance of the bond-picking. Need to dig more into the bond strategy used itself but seems intriguing.

On second thought it looks like the S&P600 gets similar returns and is much more efficient... perhaps I am better off holding S&P600 value, as I already do.

[stipeman]

I was comparing it to the Russell...since that's what it tracks.

https://www.portfoliovisualizer.com/bac ... total3=100

It's a shame PIMCO chose the obviously inferior small cap index, I guess they are a bond shop after all.

Agreed....but don't think they have an option.... believe you can only buy futures on the Russell. So blame CME for not giving us a better product

Just found it odd that the bonds bosted returns so much over the index of that fund....but not the original Stocks Plus fund. Would assume they used the same bond strategy with both, guess not.

Explained in this link:
https://www.pimco.com/en-us/insights/in ... 02299831=1

Wow, this is worth a further look. May be worth considering this fund in place of the S&P500 based ones.

In a nutshell the R2K is much more illiquid and it is more difficult to short individual stocks; this premium paid by those shorting results in futures (borrowing) costs that are usually below libor, boosting the potential outperformance of the bond-picking. Need to dig more into the bond strategy used itself but seems intriguing.

On second thought it looks like the S&P600 gets similar returns and is much more efficient... perhaps I am better off holding S&P600 value, as I already do.

If you want a 100/100 type fund and like small value you can also consider PCFIX.

[MoneyMarathon]

Fun fact: if you jump on Amazon and search "The 20% Solution: A Long Term Investment Strategy That Averages 20.13% Per Year," somebody's hawking a book for a portfolio with two leveraged ETFs, I think they're UPRO and TMF but in an aggressive 60% UPRO / 40% TMF combo. So at least the published literature so far is saying 20% and not a penny less.

"Returned." If you substitute a 4x forward-looking performance over that long run (optimistically, as a 60% portion of the portfolio - lower than the past return, for basic math reasons that Kevin has cited) from TMF instead of its 10x historical performance (which I previously calculated in this thread, from a 60% portion of the portfolio), the final result is about 60% less, and the strategy in taxable looks even less appealing.

Let me elaborate a bit. I am separating out the 60% TMF allocation part of the portfolio to itself and thinking about its contribution to performance, in a model where there are three contributors to performance: (a) the 40% UPRO allocation rebalanced with zero-correlation zero-return cash, (b) the 60% TMF allocation rebalanced with zero-correlation zero-return cash, and (c) the rebalancing 'bonus', mainly due to negative correlation.

And let me also back up a bit. Can the 40% UPRO / 60% TMF perform at 20% CAGR for the next 5 years? Yes, yes it can. That's definitely possible. Can the portion of return due to 60% TMF be positive over the next 32 years? Yes, that's also possible, maybe even likely. Should we look at performance starting from a start date like 1987 or 1982 and estimate that the performance of the portfolio "returns" 20% forward looking CAGR over the next 32 to 40 years? That's what my comment was about.

This is what I wrote previously:

Using Simba's spreadsheet:

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 7.77% CAGR and 10.97x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 8.07% CAGR and 11.96x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 16.89% CAGR and 147.45x return.

Backing out the different factors, if there were no anti-correlation effect during annual rebalancing (just zero correlation), we might have expected to get a return of 10.97 x 11.96 = 131.2x. A return of 131.2x over 32 years is a CAGR of 16.46%. We actually got a CAGR of 16.89% which allowed us to get an extra 12.4% accumulated over a 32 year time period.

The added value of 60% TMF over the 32 years here was divided between 11.96x return, by itself with zero correlation to no-yield cash, and an extra 1.12x return thanks to the incremental benefit of being anti-correlated with UPRO. Understandably, then, I believe it should be plain that if TMF doesn't deliver strong positive yield all on its own, then you're not going to get it anything close to working like it did 1980s to present.

I think there is possibly an argument that TMF rebalancing with plain cash delivers its own premium, maybe by making good trades. But a starting 60% TMF (not even 100%) without rebalancing actually did even better. Without rebalancing into cash, a portfolio that drifted into a larger percentage allocation to TMF over time returned 15.6x or 8.96% CAGR. TMF just plain did well in this time period.

The main reason why TMF did very well (not middling, neutral, or negative) is simply linked to how the price of a bond is calculated.

That is, the yield on 30-year treasuries went down.

I can redo this with the 1982-2018 time period.

40% UPRO rebalanced annually with plain cash (zero correlation, no interest) provided 8.52% CAGR and 20.61x return.
60% TMF rebalanced annually with plain cash (zero correlation, no interest) provided 10.56% CAGR and 41.04x return.
40% UPRO / 60% TMF rebalanced annually with each other provided 19.9% CAGR and 823.82x return.

There's a lot of different possible future scenarios. Some of them could involve crazy good rebalancing opportunities or something. But historically a negative-correlation rebalancing bonus hasn't been a big factor at all, beyond just saving the components from themselves (mitigating volatility drag). Rebalancing with zero-return, zero-correlation cash with the two components of the portfolio, separately, explains 99% of the returns. So we can approximate an estimate by just looking at the returns of each asset separately.

One number mentioned was 9% CAGR for the S&P 500. Based on that, suppose the 40% UPRO portion returned 10% CAGR, more than historically.

If there is no return from the price side for bonds, and if the spread between LIBOR and the 30-year rate stays this low, its returns are not very much. Let's be generous again. Suppose that the spread immediately widens, and the fund provides a net yield-based return on its positions, after the expense ratio and other costs, that is whatever the current yield is. For example, it's currently 2.25% yield.

In order to make up the difference between 10% CAGR and 20% CAGR, the bond side needs to turn 1.1x into 1.2x. That is, it needs to make a return of 9%. Let's say it somehow keeps a 2.25% yield, regardless of price movement (maybe the t-bill rate goes negative), again being generous. That turns 1.1x into 1.125x. We still need at least 1.066x (6.6% CAGR) just from the price movement on the 60% TMF position.

Good thing we've got some ammo for downward yield movement, and a convenient calculation already for the price return from the bond side for the movement to zero yield. From there we can figure out how sustainable 20% CAGR is, at least before moving into negative yield for 30 year bonds. Maybe that could continue, ad infinitum. It's mathematically possible.

Assuming a 25-year par bond (coupon rate = yield) is rolled annually starting at 3%, with rates dropping one percentage point per year, here are the annual capital returns:

3% -> 2%: 19.5%
2% -> 1%: 22.0%
1% -> 0%: 25.0%

91% return in a low-return world is unmatchable. How many years would it take equities to return that much, given the latest forecasts out of Vanguard, etc?

I said I was being generous, so I'm going to keep that 91% return from price figure in mind, ignoring the fact that we're a lot closer to 2% yield right now than 3% yield. For negative yield hopefuls, they might figure it's the part of the price return they're getting from negative yields, when the short term rate is even negative-er.

But it's a 1.8 x 91% return from price movement, or thereabouts, because we have 60% of the portfolio 3x levered into long term treasuries. In other words, 3.43x return from price movement, all with rosy assumptions.

OK, so the question is how many years can we spread 3.43x over while multiplying by 1.066x in each year. The math problem is 1.066 ^ n = 3.43. The solution is log(3.43) / log(1.066). The answer is 19.28 years.

So, with a host of very optimistic and very charitable assumptions, it could sustain 20% CAGR for the next 19.28 years. This could be considered a vindication of the OP, since it originally called for getting out after 20 years. If everything goes perfectly, it's not impossible to get out in 20 years after getting 20% CAGR. That is the point at which a 40x completely hypothetical return is achieved. 100x is not achieved at a 20% CAGR rate.

For the next 30 or 40 years? A 20% CAGR is sustainable only if we enter a new world where negative yields know no bounds, or if stocks decide 9% in the long run just isn't good enough.

[firebirdparts]

.

At that point the risk-reward just isn't worth it.

I Guess that would eliminate a lot of people. I can’t buy ETFs in a 401k. I don’t have a lot of IRA funds. What sort of account do have this in?