WSJ: leveraged portfolios are good for you!

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
willthrill81
Posts: 27088
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

skierincolorado wrote: Tue Nov 23, 2021 12:59 pm
LFKB wrote: Tue Nov 23, 2021 12:57 pm
willthrill81 wrote: Tue Nov 23, 2021 12:27 am
LFKB wrote: Tue Nov 23, 2021 12:14 am
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
I don’t like Letf because of the high fees.. but yes pre fees they have done well. And we can simulate back over a century as well and they have done fine
That's also been the problem with active management. Before fees, many active managers have beaten the market, but once fees are subtracted, few have done so.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
skierincolorado
Posts: 1111
Joined: Sat Mar 21, 2020 10:56 am

Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

willthrill81 wrote: Tue Nov 23, 2021 1:10 pm
skierincolorado wrote: Tue Nov 23, 2021 12:59 pm
LFKB wrote: Tue Nov 23, 2021 12:57 pm
willthrill81 wrote: Tue Nov 23, 2021 12:27 am
LFKB wrote: Tue Nov 23, 2021 12:14 am

Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
I don’t like Letf because of the high fees.. but yes pre fees they have done well. And we can simulate back over a century as well and they have done fine
That's also been the problem with active management. Before fees, many active managers have beaten the market, but once fees are subtracted, few have done so.
But unlike active management there is no fundamental reason for the high fees. It’s just not a competitive market probably partially because of the sec but mostly because investors seeking leverage are probably sophisticated enough to do it on their own with futures.
User avatar
willthrill81
Posts: 27088
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

skierincolorado wrote: Tue Nov 23, 2021 1:15 pm
willthrill81 wrote: Tue Nov 23, 2021 1:10 pm
skierincolorado wrote: Tue Nov 23, 2021 12:59 pm
LFKB wrote: Tue Nov 23, 2021 12:57 pm
willthrill81 wrote: Tue Nov 23, 2021 12:27 am

Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
I don’t like Letf because of the high fees.. but yes pre fees they have done well. And we can simulate back over a century as well and they have done fine
That's also been the problem with active management. Before fees, many active managers have beaten the market, but once fees are subtracted, few have done so.
But unlike active management there is no fundamental reason for the high fees. It’s just not a competitive market probably partially because of the sec but mostly because investors seeking leverage are probably sophisticated enough to do it on their own with futures.
That may be true, but futures aren't free either.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
skierincolorado
Posts: 1111
Joined: Sat Mar 21, 2020 10:56 am

Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

willthrill81 wrote: Tue Nov 23, 2021 1:20 pm
skierincolorado wrote: Tue Nov 23, 2021 1:15 pm
willthrill81 wrote: Tue Nov 23, 2021 1:10 pm
skierincolorado wrote: Tue Nov 23, 2021 12:59 pm
LFKB wrote: Tue Nov 23, 2021 12:57 pm

Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
I don’t like Letf because of the high fees.. but yes pre fees they have done well. And we can simulate back over a century as well and they have done fine
That's also been the problem with active management. Before fees, many active managers have beaten the market, but once fees are subtracted, few have done so.
But unlike active management there is no fundamental reason for the high fees. It’s just not a competitive market probably partially because of the sec but mostly because investors seeking leverage are probably sophisticated enough to do it on their own with futures.
That may be true, but futures aren't free either.
There are very nearly no fees. There is a financing cost similar to LETF but the LETF fees are on top of that.
jarjarM
Posts: 1815
Joined: Mon Jul 16, 2018 1:21 pm

Re: WSJ: leveraged portfolios are good for you!

Post by jarjarM »

LFKB wrote: Tue Nov 23, 2021 12:57 pm Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
It all depends on the starting date, if you were to start in year 2000 on a 3X strategy with SP500, you'll be underwater when compare to SP500. Now, are we at a place similar to 2000 or worse or better, that's the real million dollar question.
User avatar
David Jay
Posts: 12022
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: WSJ: leveraged portfolios are good for you!

Post by David Jay »

willthrill81 wrote: Tue Nov 23, 2021 1:08 pm
David Jay wrote: Tue Nov 23, 2021 11:12 am
willthrill81 wrote: Fri Oct 15, 2021 1:54 pm
tomsense76 wrote: Fri Oct 15, 2021 1:46 pm There's also a tendency for a bunch of products to come out right at the moment when a strategy stops working. So this is in the back of my mind as well.
Maybe, maybe not. Vanguard introduced their SCV fund (VISVX) in mid-1998, and it went on to smoke TSM over the next decade.
Perhaps you read the comment too quickly, because your reply is a logical fallacy.

One anecdote about a strategy that did not stop working says nothing whatsoever about strategies that stopped working and concurrently a bunch of products were launched implementing said strategy.
No fallacy here. I said maybe and maybe not and provided an example of when a strategy did not stop working once funds came out to target the strategy. Nothing more, nothing less.
You are making my point that you mis-understood Tom's point. He did not say that strategies stop working after [i.e. because] funds came out. He said that many strategies stop working and funds come out anyway [i.e. to "exploit" what is already, at the time of fund creation, a defunct strategy].
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
willthrill81
Posts: 27088
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

David Jay wrote: Tue Nov 23, 2021 3:07 pm
willthrill81 wrote: Tue Nov 23, 2021 1:08 pm
David Jay wrote: Tue Nov 23, 2021 11:12 am
willthrill81 wrote: Fri Oct 15, 2021 1:54 pm
tomsense76 wrote: Fri Oct 15, 2021 1:46 pm There's also a tendency for a bunch of products to come out right at the moment when a strategy stops working. So this is in the back of my mind as well.
Maybe, maybe not. Vanguard introduced their SCV fund (VISVX) in mid-1998, and it went on to smoke TSM over the next decade.
Perhaps you read the comment too quickly, because your reply is a logical fallacy.

One anecdote about a strategy that did not stop working says nothing whatsoever about strategies that stopped working and concurrently a bunch of products were launched implementing said strategy.
No fallacy here. I said maybe and maybe not and provided an example of when a strategy did not stop working once funds came out to target the strategy. Nothing more, nothing less.
You are making my point that you mis-understood Tom's point. He did not say that strategies stop working after [i.e. because] funds came out. He said that many strategies stop working and funds come out anyway [i.e. to "exploit" what is already, at the time of fund creation, a defunct strategy].
His reply to my post did not indicate that I misunderstood his point.

At any rate, I'm not going to continue to respond on this issue.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
Forester
Posts: 2217
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: WSJ: leveraged portfolios are good for you!

Post by Forester »

Phil DeMuth wrote: Mon Nov 22, 2021 1:26 pm What are people are using for the "returns stacking" outside investments to complete the NTSX portfolio?
The authors talk about using Managed Futures or Global Macro liquid alternative funds, but these show a wide range of returns, which takes us back to the difficult Boglehead problem with active management and picking winners. Gold or commodities might be another answer. But the search of uncorrelated asset classes with a positive expected return is not easy.
Barclays CTA Index is barely outpacing inflation https://portal.barclayhedge.com/cgi-bin ... -CTA-Index

There had been hope that a commodity bull market would rescue CTA performance. The Goldman Sachs commodity index (long only) is of course hugely positive for this year but LT performance has been poor https://www.spglobal.com/spdji/en/indic ... /#overview In general I think this space is crowded with limited potential to stack returns, in theory CTAs are nimble and can sidestep commodity bear markets while profiting from bull markets but in reality they spin their wheels as they get chopped in and out of positions according to their automated trading strategies.
Amateur Self-Taught Senior Macro Strategist
Phil DeMuth
Posts: 196
Joined: Thu Mar 06, 2008 7:02 pm

Re: WSJ: leveraged portfolios are good for you!

Post by Phil DeMuth »

I forgot to include one other idea the authors mention as a supplement to NTSX: a short-term corporate bond fund. For some reason, the credit risk seems to be more than offset by their shorter duration, so the yield could be a small supplemental source of returns.
User avatar
bobcat2
Posts: 5631
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: WSJ: leveraged portfolios are good for you!

Post by bobcat2 »

skierincolorado wrote: Tue Nov 23, 2021 12:58 pm
nisiprius wrote: Tue Nov 23, 2021 12:42 pm
How about what an MIT economist like Paul Samuelson thought about Ayres and Nalebuff?
In 2008, Paul Samuelson wrote:...The ideas that I have been criticizing do not shrivel up and die. They always come back... Recently I received an abstract for a paper in which a Yale economist and a Yale law school professor advise the world that when you are young and you have many years ahead of you, you should borrow heavily, invest in stocks on margin, and make a lot of money. I want to remind them, with a well-chosen counterexample: I always quote from Warren Buffett (that wise, wise man from Nebraska) that in order to succeed, you must first survive. People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game...

Samuelson was like 97 when he wrote that and it is inconsistent with his earlier writings. Ayers and Nalebuff site Samuelson extensively, and unlike the paragraph you quoted their work is peer reviewed.


Not that inconsistent. Here is more of what Samuelson wrote in 2008.
Many analysts argue that when you average over many investment periods, so favorable are the long-run returns of stocks that while you are still young, you should borrow substantially to hold large positions in stocks and you should do so because some kind of “stochastic dominance” is supposed to justify it.

Now, when I read such things, my eyebrows arch upwards. I think I have written 27 articles rebutting this idea—with at least one article completely in one syllable words, except for the word “syllable” itself.
- And most of those 27 articles were peer reviewed.

Samuelson was 93 when he wrote the above not "like 97" and in any event ageism is not a good look for any poster including you, skierincolorado. And in this particular case there is no indication that Samuelson's mental acuity was dampened much by age. For example, Samuelson would assuredly have been sharp enough to write
" Ayers and Nalebuff cite Samuelson extensively"
and not the laughably wrong -
"Ayers and Nalebuff site Samuelson extensively"

BobK :wink:
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
User avatar
nisiprius
Advisory Board
Posts: 45166
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: WSJ: leveraged portfolios are good for you!

Post by nisiprius »

His age was no more than eight squared when he wrote Why We Should Not Make Mean Log of Wealth Big Though Years To Act Are Long. It is fun to read and makes a point by the way in which he wrote it, but it is too bad that the truth is that the use of such short words makes his point less clear, not more clear.

It is, however, perfectly consistent with his 2008 comments, quoted by bobcat2, on "a paper [by] a Yale economist and a Yale law school professor" (Nalebuff is a Yale economist and Ayres is a Yale law school professor). Their book does indeed cite Samuelson frequently, and I think it was ungracious of them to invoke his name, as if he were supporting work that he was on the record as rejecting.

Mortgage your retirement or don't mortgage your retirement, but don't say that Paul Samuelson recommended doing it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
bgf
Posts: 1760
Joined: Fri Nov 10, 2017 9:35 am

Re: WSJ: leveraged portfolios are good for you!

Post by bgf »

Right now:

3x SP500 ETF -6.4%
3x Long Duration Treasuries ETF +6.4%

Looks good.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Post Reply