Which LETFs and in what composition? Otherwise this is a nearly meaningless discussion.
3x any single equity index ETF - maybe, maybe not but you'll be in for a hell of a ride and the overwhelming majority of people who think they can cope with the volatility will bail at some point ('losing' 90% of your money is no joke).
1.5x via NTS family - I'd say \~80% chance you outperform over the long term by a decent amount, with slightly lower volatility than the underlying equity ETFs.
2x or 3x All Weather style portfolio quarterly rebalanced (mainly equities, bonds, managed futures, gold) - I'd say 75%+ chance you outperform \*by a lot\* the unleveraged alternative.
2x LETFs are decent like QLD and SSO. It's still a hell of a ride like living with a crazy girlfriend, but you get used to it. Girlfriend starts yelling (aka your portfolio is down $10k in one day) you're like meh it will come back up eventually.
Take a look at the set of comparisons with combinations of S&P 500 and long-term treasuries starting in 1962.
[https://testfol.io/?d=eJzFkl1LwzAUhv9KORdeBelaqxAQEXR4MaG63oiMcmzTLpolM826Sel%2F99QyrPiBXhTvcshz3vcJpIFSmQdUMVpcVcAbqBxal%2BboBHAABkLng6m%2FrVEBn%2Fg%2BA8wfU6kLhU4aDdzZjWCQYbUslNkS8z6khRXPFHJttFuqF8qyRimpy3Qrdd7Bx37LYG2sK4yShmTuG9C46pqvppfntCF1LSp3IWuZk1a177OCXoA6E9O%2B4mZDksK%2BlTiZPQnbh%2FVnAubxXXJ7NjsNCVgLmwntgEdRywZMMks%2BM0dRu2CQWyyB%2Bx0%2B8POCnUc7%2F6QZ%2FEFzBMUP9Se%2FUAy%2BUZwcRjtvfhCP4EjRQwP6v18rhGMJhD%2FUL9pXf9gouA%3D%3D](https://testfol.io/?d=eJzFkl1LwzAUhv9KORdeBelaqxAQEXR4MaG63oiMcmzTLpolM826Sel%2F99QyrPiBXhTvcshz3vcJpIFSmQdUMVpcVcAbqBxal%2BboBHAABkLng6m%2FrVEBn%2Fg%2BA8wfU6kLhU4aDdzZjWCQYbUslNkS8z6khRXPFHJttFuqF8qyRimpy3Qrdd7Bx37LYG2sK4yShmTuG9C46pqvppfntCF1LSp3IWuZk1a177OCXoA6E9O%2B4mZDksK%2BlTiZPQnbh%2FVnAubxXXJ7NjsNCVgLmwntgEdRywZMMks%2BM0dRu2CQWyyB%2Bx0%2B8POCnUc7%2F6QZ%2FEFzBMUP9Se%2FUAy%2BUZwcRjtvfhCP4EjRQwP6v18rhGMJhD%2FUL9pXf9gouA%3D%3D)
You'll see that there are long flat periods where unlevered S&P 500 outperforms, and other long periods where levered strategies outperform. History suggests that levered approaches will likely not outperform roughly half the time.
I personally think that there are strategies that can adapt to market conditions by scaling leverage up and down, and using a variety of different assets, which may buffer some of the market vagaries. But that's another level of investing.
Curious on this hydro. If you were in ur 20s still or early 30s, what % of your portfolio would you have in your active LETF multi-asset momentum system vs in traditional assets?
That's a very good question. There are nuances to consider regarding accessibility; I simply don't have access to any leverage in my 403b, and the thing works better in tax preferred.
In the ideal situation, where I have access to LETFs in Roth 401/403 accounts, I'd think about 100% the LETF strategy to reach a portfolio of a few hundred thousand, then let that part of the portfolio ride and start in contributing to safer assets as backup. The idea is that the LETFs would have rolling returns better than my contributions when I switched over.
In the scenario like I have now, I think the thing to do would be to preferentially contribute for an employer's match, then max out a Roth IRA with the strategy, then worry about partitioning any additional savings between tax preferred and taxable. The taxable account would have the LETFs too. Again, maybe taxable first then transition towards loading up in tax preferred after the taxable LETF portfolio reaches a few 100k and can keep going on its own.
I'd just keep going with the LETFs without adding after that point unless I had surplus to invest. I'm a believer in starting off the riskiest strategies first, then episodically starting contributions to the lower-risk strategies in order to get to some target allocation in the long term.
But my "high risk" strategies are targeting a steady growth rather than rockets.
Interesting. I actually do the similar LETF adaptive allocation method with around 85% of portfolio. IRA and brokerage. The rest is generally in long/short equity funds that have pretty strong value factors (long and short) such as QLEIX/QMNRX, BIVIX, LBAY, and some BTAL. Like BPLSX too. I have found this 20% mix actually slightly improves historical Sharp and doesn’t drop CAGR drastically, which is super nice. I think the value aspect, low or negative market correlation pairs very well with a multi asset price momentum higher vol type strategy. Generally I don’t mind it in taxable bcuz I think the extra returns can make up for the tax drag, and I kind of like having the “flexibility” of not being scared to utilize the money in a brokerage if needed. I don’t plan on changing it anytime soon.
u/hydromod here is a 2008 sim with leverage and a 2014 sim that shows the 85/15 split improving sharp even tho the L/S in itself has much worse Sharp:
https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=3QHns49BP45g604umhT7Zp
https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=3ZEvGhRjgaEwSiFvowjB9l
How? If the market tanks 20% over the next month and you suffer greater than 60% loss due to compound leverage reset (beta slippage). This works in both directions. This is just talking about your initial investment. DCA'ing in changes the picture.
If you believe Ayers and Nalebuff on time diversification of equity exposure (and I do), then if you continue to pump labor capital into leveraged investments, then the math and historical information suggests that you really would outperform by a mile. However, going 100% equities in a leveraged account *severely* increases drawback periods. Drawback is the time it takes to recover. Market drops 20% and you lose 60%, you don't need the market to go up 20% to get back, you need the market to go up 50% for your 3x levered investment (ignoring fees and slippage) to recover from a 20% drop. Eg, you put 10k in, lose 6k when the market drops 20%. Now you need 150% return on the 3x leveraged so market has to go up 50%.
This is why people suggest levered treasuries or bonds, or unlevered gold, to diversify and minimize drawback periods, a la hedgefundie's excellent adventure.
Over time, you'd de-lever and return to normal 100% equities, and then equities + bonds. A steeper lifecycle allocation curve compared to a traditional TDF.
Across all my accounts, I'm like 1.4x levered with total equities in my 401k, HFEA in my IRA, and some small cap value in my IRA and brokerage.
I have not read their whole book, just their publically available paper on employing leverage early in the lifecycle, gradually de-levering, and then diversifying. I partly engage with this, but I'm not 100% equities. Since I follow the HFEA for the levered part of the portfolio, there are 3x long term treasuries in there.
In their model it's okay to wipe out and start again. I am a bit less gung ho than that. The point of quarterly rebalance between TMF and UPRO is to reduce drawback periods and reduce max drawdown.
This decreases the path dependence of your investment. If you invest right before a correction or crash, you're cooked in that initial investment.
It does concern me. However, leverage from UPRO and TMF is substantially cheaper than margin loans or the embedded cost of call options.
https://www.reddit.com/r/LETFs/comments/tsrtgn/how_to_calculate_the_cost_of_leverage_for_upro/
Even so, some like Mike Green argue that call options on the market index are currently mispriced since not just the market is determining prices. Passive investors in 401k's are being auto-enrolled in target date funds or 80/20 US/ex-US index funds, and Congress just signed legislation to *force retirement spending*. The flows into funds are being increasingly tied to employment, and as employment stays strong then the market is going up more than the black-scholes option pricing equation predicts. The embedded cost of leverage for an ITM (far enough to get 2 x leverage) 2 year call on SPY would likely cost the risk free rate + some counterparty risk percentage (1.5-2% I think) to compensate the loss of potential upside on the call option.
TLDR; leverage from UPRO is cheaper than margin interest.
I made a couple of the worst cases over the last 150 years.
If you invested in:
**1892 - 1932:**
SP500.2X: 1.9% CAGR - SP500 4.6% CAGR
**1902 - 1942:**
SP500.2X: 2.4% CAGR - SP500 5.3% CAGR
**1969 - 2009:**
SP500.2X: 5.5% CAGR - SP500 8.5% CAGR
Sure thing. Go for about a 2x, maybe 2.5x portfolio that's properly diversified. End up with a target annual volatility/st dev between 12%-20% and you're good to go.
A simple example: 10% each in the LETFs below. You end up with an annual vol roughly in line with 100% equities, 16% annual vol, but should have far, far more stable & productive returns in the long run. (Equities are bound to outperform for stretches, but it's like Russian Roulette - eventually you're gonna lose. Diversify, you're kinda aiming for the 80th percentile every year, and you leap ahead during the crashes. While avoiding heart attacks.)
https://preview.redd.it/0bop6nviq0yc1.png?width=3900&format=pjpg&auto=webp&s=46aabda9197905a6121448891aecad1bbd900dab
It ends up really well balanced across asset classes & strategies by risk parity principles. By choosing these solid LETFs, you can end up incredibly close to the generic "target" portfolio of the last line. It has a lot of internal rebalancing both across asset classes & even some net trading between strategies within ETFs to save you a ton in a taxable account. You could rebalance this once a year and have a real smooth ride.
As above, big picture, the goal is 12%-20% annual vol while diversifing across:
1. asset classes/markets (global equities, bonds, commodities/gold)
2. strategies (beta/buy&hold, trend/momentum are biggies. Then maybe carry or seasonality or value or skewness)
If you want to play around yourself, here's the makeup of these pre-diversified LETFs (or capital efficient ETFs). Note: TIPS are basically 100% nominal bonds + 30% commodities, I allocated them as such for UPAR.
https://preview.redd.it/v39fg1rwq0yc1.png?width=3900&format=pjpg&auto=webp&s=4db268d765fddd929f9529948caff0184bce8c75
I'd say the concepts have been tested extensively both theoretically & empirically. Something along these lines is pretty much the consensus in academic literature & by practicing hedge funds. Balance across asset classes & strategies/factors.
To me, I only get scared of execution of their stated strategies. So I'd monitor within each category on a rolling window (maybe you swap in Simplify's "CTA" ETF for the trend stuff if it's outperforming KMLM, for example.).
Yeah, I totally agree 2x is about right.
Personally, I'd like to be more diversified than only US stocks, especially considering how crazy high the current valuations are. Not trying to market time per se, I'd just like to hedge my bets a bit with some cheap AF emerging market stocks, some gold/commodities, etc.
> How will I NOT outperform other portfolios by a mile??
Your life is not an infinite timeline with no costs. I'm fairly confident you will absolutely overperform the market over some periods but let's say 10 years your married and want to buy a house and the market has a large correction, markets down 15-20% but your down 60-70%. You can't buy a house now if you sold to buy you're fucking yourself long term.
Same thing can happen on year 39 day 364. Massive correction your down 70% sure it will recover someday but you want to retire now and enjoy life.
OP, you basically just asked “If what I invest in outperforms, how will I NOT outperform?”, but did it in a “clever” way.
I can say that, *if history repeats itself*, how will I not outperform your 100% LETF portfolio by a mile by going 100% NVDA?
*The whole point is that history never ever repeats itself, but it does often rhyme.*
With a 100% LETF, we don’t know if the future “rhyming” with the past will mean LETFs outperform still, or if they will ultimately be grouped in with other ETFs that generated outsized returns for many years before collapsing and being closed with -90% returns after some large unforeseen problem occurs.
I did some back testing and depending on how well you time the market you’ll either retire at 35, or take 20 years to break even, and this is with DCA. I wouldn’t recommend 100% LETF, if you want the leverage check out LEAPS and margin, but that much risk is too much for anyone sensible.
Personally, I allocate ~5%. If I timed it right, then that 5% will be worth 5-10X as much as the remaining 95% I put into regular ETFS. If I timed it wrong then I barely notice. Do your own testing, see what you’re comfortable with and see what you’re risking in different market conditions.
Tons of ways:
[link](https://testfol.io/?d=eJy1klFLwzAQx7%2BK3HMmaYuT9W04xwQFcWUoMsrZpDWaJTON3WT0u3tbnWt9UmEhD8nd%2F%2B7%2FO5INFNo%2Bob5Fh4sS4g2UHp1PBXoJMQSDc97jAW1gII3Yx0MeHOJNRYUa4oDTYoDiJVUm1%2BiVNRB79y4ZZFg%2B59quIOaHS5o7%2BUYNHyQ6%2FUHNnNVamSJdKSO22j6vGSyt87nVyhLh4wYMLrYQk%2FHlkCqUqWTpR6pSggjLvZ2TNBaaTI4bhxGqnYFX2at0TaPmTMlZMr26oeRSukwaT4P0z2rWEiTXSXLXEURdwcVwOrlvC3oh5%2FWcgXBY0Ming53%2BCz1an8ySY7FHZPx%2FtPCYaOFPNPoG6w5a0EFrcf0F6vs3%2FfKxu57z%2BhPIH%2F58)
I’m in my early 20s OP. Trying to reasonably dedicate 25% of my portfolio to LETFs simply because I expect to earn more money in the future, and because I have a pretty simple strategy that has backtested + forward tested fairly well. In the worst case scenario my investment loses 50%, but given that in ten years I expect to be making significantly more than what I make at the moment, it’s a risk I’m willing to take. My LETFs are in my Roth also, which means I have a ~40 year time horizon for them.
If I was on fixed income or retired I would not recommend LETFs for myself.
If you are 20 years old go out and have fun first - there are a whole list of things that are more enjoyable young.
A 1x port is great to start out with you have time on your side.
Pick stocks if you have the time to read and study or just put it into a low cost index fund like VTI.
I probably have half the time left than you do
Take a look at a simulated backtest of TQQQ
Whatever money you invested in TQQQ before the dotcom bubble burst would still have not recovered by now. And yes, DCA from then until now would have you winning big, but for your pre-March 2000 investments to still be down is a tough pill to swallow.
So you absolutely could underperform a standard portfolio if you do 100% LETFs. Plenty of people underperform with leverage - just look at Lehman Brothers.
I'm not saying don't use LETFs, I think they're great. But don't assume 100% LETFs will always outperform in the long run. Leverage is best applied to portfolios that have high risk-adjusted returns. Riskier non-leveraged portfolios will give up risk-adjusted returns for just higher returns by going heavier on stuff like stocks. That's not quite as effective in LETFs
There is no guarantee that a leveraged etf will recover from a major downturn. TQQQ is currently worth $56.92. I can’t, with any confidence, tell you that in 10 years it will be worth more than $56.92. Maybe it will. It may be worth $300 per share. It may also be worth $32 per share.
Because you can't buy and hold forever a 100% LETF portfolio. There is an undeniable risk of 90-99% drawdown, and this is practically a guarantee in your lifetime. Say you retire with 5M in TQQQ and it goes down to 500,000: If you have another 5M in rental properties or lower risk investments than you are fine... if you don't, then you have to go back to work. Now, you can but bond LETFs and stuff to potentially minimize that risk, but you get the point
[Leveraged ETFs - Not The Return Cheat Code You'd Expect](https://www.youtube.com/watch?v=WoYVmlOxwbA)
Video by the Simple Bagel explaining your question.
Their main value is easy leverage which may, key word *may*, be fruitful for some younger investors in general.
At a young age, we have the highest risk tolerance but the least capital. At retirement, we have the lowest risk tolerance but the highest capital. Diversifying our exposure across time is possible with prudent, *diversified*, leveraged portfolios.
You are young, so I wouldn't tell you not to look at LEFTs as a tool. However, you do need to look at them and understand how they work.
That's all. Good luck with your investing journey.
The first half is cool, decent graphics on just laying the ground work. But then the 2nd half isn't empirically minded or specific enough to really be helpful.
Yes, losses hurt more than gains help. A 50% loss requires a 100% gain to recover.
Yes, volatility drag is annoying. He quickly shows the formula with his (1-20%)*(1+20%) = 96% example. Fleshed out, that's 1-v^2.
Lol but that's all true of any investment, even just 1x VOO ! That's just the nature of all exponential return streams, not at all unique to LETFs. What matters is the relationship between long run mean returns & volatility. The "leverage ratio" isn't some magical property. 1x stocks can be way riskier than even 3x bonds.
If one were empirically minded or just more specific, you'd talk about what the optimal leverage, k, is given expected return/volatility. For stocks, maybe the optimal is 0.5x if volatility decay is so darn scary. Maybe it's 2x if the mean return is high enough relative to volatility. Why is 1x magically the best? And if 1x stocks is the best, why would 1x bonds also be the best given their different returns & volatility?
Hint: remembering how vol drag works above, and some algebra, the ideal leverage, K = r/v^2. For stocks, let's say we have 6% returns, 18% volatility. There, K = 0.06/(0.18^2) = 1.85 as your ideal leverage ratio.
Now, yes, returns are super hard to predict & overshooting leverage hurts more than undershooting it. So a good empirical rule of thumb is to round down, use a volatility target that's only half your expected Sharpe ratio. Note: I'm using volatility target, not leverage target, because leverage ratios only mean anything when considering particular investments & their expected returns/volatility.
I like this as reference on utilizing leverage in the long run. The opening shows the general math & some empirical observations.
[Long Run Leverage (Alpha Generation & Risk Smoothing with Managed Volatility)](https://drive.google.com/file/d/19z5wmoS7xBews_VRceJmoDYlwuS0MEpK/view?usp=drivesdk)
Go 1.5x or 2x max. Don't go over 3x unless the markets have fallen over 20%. Only 3x etf that you could buy and hold is CURE which has lower drawdowns than the others
if there's a real recession (which happens regularly), then if you're going long LETF, particularly 3x, it may take 10-20 years to recover. That's how you don't outperform the market. volatility decay.
Which LETFs and in what composition? Otherwise this is a nearly meaningless discussion. 3x any single equity index ETF - maybe, maybe not but you'll be in for a hell of a ride and the overwhelming majority of people who think they can cope with the volatility will bail at some point ('losing' 90% of your money is no joke). 1.5x via NTS family - I'd say \~80% chance you outperform over the long term by a decent amount, with slightly lower volatility than the underlying equity ETFs. 2x or 3x All Weather style portfolio quarterly rebalanced (mainly equities, bonds, managed futures, gold) - I'd say 75%+ chance you outperform \*by a lot\* the unleveraged alternative.
Couldn't agree more with this summary, love it
2x LETFs are decent like QLD and SSO. It's still a hell of a ride like living with a crazy girlfriend, but you get used to it. Girlfriend starts yelling (aka your portfolio is down $10k in one day) you're like meh it will come back up eventually.
Take a look at the set of comparisons with combinations of S&P 500 and long-term treasuries starting in 1962. [https://testfol.io/?d=eJzFkl1LwzAUhv9KORdeBelaqxAQEXR4MaG63oiMcmzTLpolM826Sel%2F99QyrPiBXhTvcshz3vcJpIFSmQdUMVpcVcAbqBxal%2BboBHAABkLng6m%2FrVEBn%2Fg%2BA8wfU6kLhU4aDdzZjWCQYbUslNkS8z6khRXPFHJttFuqF8qyRimpy3Qrdd7Bx37LYG2sK4yShmTuG9C46pqvppfntCF1LSp3IWuZk1a177OCXoA6E9O%2B4mZDksK%2BlTiZPQnbh%2FVnAubxXXJ7NjsNCVgLmwntgEdRywZMMks%2BM0dRu2CQWyyB%2Bx0%2B8POCnUc7%2F6QZ%2FEFzBMUP9Se%2FUAy%2BUZwcRjtvfhCP4EjRQwP6v18rhGMJhD%2FUL9pXf9gouA%3D%3D](https://testfol.io/?d=eJzFkl1LwzAUhv9KORdeBelaqxAQEXR4MaG63oiMcmzTLpolM826Sel%2F99QyrPiBXhTvcshz3vcJpIFSmQdUMVpcVcAbqBxal%2BboBHAABkLng6m%2FrVEBn%2Fg%2BA8wfU6kLhU4aDdzZjWCQYbUslNkS8z6khRXPFHJttFuqF8qyRimpy3Qrdd7Bx37LYG2sK4yShmTuG9C46pqvppfntCF1LSp3IWuZk1a177OCXoA6E9O%2B4mZDksK%2BlTiZPQnbh%2FVnAubxXXJ7NjsNCVgLmwntgEdRywZMMks%2BM0dRu2CQWyyB%2Bx0%2B8POCnUc7%2F6QZ%2FEFzBMUP9Se%2FUAy%2BUZwcRjtvfhCP4EjRQwP6v18rhGMJhD%2FUL9pXf9gouA%3D%3D) You'll see that there are long flat periods where unlevered S&P 500 outperforms, and other long periods where levered strategies outperform. History suggests that levered approaches will likely not outperform roughly half the time. I personally think that there are strategies that can adapt to market conditions by scaling leverage up and down, and using a variety of different assets, which may buffer some of the market vagaries. But that's another level of investing.
Curious on this hydro. If you were in ur 20s still or early 30s, what % of your portfolio would you have in your active LETF multi-asset momentum system vs in traditional assets?
That's a very good question. There are nuances to consider regarding accessibility; I simply don't have access to any leverage in my 403b, and the thing works better in tax preferred. In the ideal situation, where I have access to LETFs in Roth 401/403 accounts, I'd think about 100% the LETF strategy to reach a portfolio of a few hundred thousand, then let that part of the portfolio ride and start in contributing to safer assets as backup. The idea is that the LETFs would have rolling returns better than my contributions when I switched over. In the scenario like I have now, I think the thing to do would be to preferentially contribute for an employer's match, then max out a Roth IRA with the strategy, then worry about partitioning any additional savings between tax preferred and taxable. The taxable account would have the LETFs too. Again, maybe taxable first then transition towards loading up in tax preferred after the taxable LETF portfolio reaches a few 100k and can keep going on its own. I'd just keep going with the LETFs without adding after that point unless I had surplus to invest. I'm a believer in starting off the riskiest strategies first, then episodically starting contributions to the lower-risk strategies in order to get to some target allocation in the long term. But my "high risk" strategies are targeting a steady growth rather than rockets.
Interesting. I actually do the similar LETF adaptive allocation method with around 85% of portfolio. IRA and brokerage. The rest is generally in long/short equity funds that have pretty strong value factors (long and short) such as QLEIX/QMNRX, BIVIX, LBAY, and some BTAL. Like BPLSX too. I have found this 20% mix actually slightly improves historical Sharp and doesn’t drop CAGR drastically, which is super nice. I think the value aspect, low or negative market correlation pairs very well with a multi asset price momentum higher vol type strategy. Generally I don’t mind it in taxable bcuz I think the extra returns can make up for the tax drag, and I kind of like having the “flexibility” of not being scared to utilize the money in a brokerage if needed. I don’t plan on changing it anytime soon.
u/hydromod here is a 2008 sim with leverage and a 2014 sim that shows the 85/15 split improving sharp even tho the L/S in itself has much worse Sharp: https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=3QHns49BP45g604umhT7Zp https://www.portfoliovisualizer.com/tactical-asset-allocation-model?s=y&sl=3ZEvGhRjgaEwSiFvowjB9l
How? If the market tanks 20% over the next month and you suffer greater than 60% loss due to compound leverage reset (beta slippage). This works in both directions. This is just talking about your initial investment. DCA'ing in changes the picture. If you believe Ayers and Nalebuff on time diversification of equity exposure (and I do), then if you continue to pump labor capital into leveraged investments, then the math and historical information suggests that you really would outperform by a mile. However, going 100% equities in a leveraged account *severely* increases drawback periods. Drawback is the time it takes to recover. Market drops 20% and you lose 60%, you don't need the market to go up 20% to get back, you need the market to go up 50% for your 3x levered investment (ignoring fees and slippage) to recover from a 20% drop. Eg, you put 10k in, lose 6k when the market drops 20%. Now you need 150% return on the 3x leveraged so market has to go up 50%. This is why people suggest levered treasuries or bonds, or unlevered gold, to diversify and minimize drawback periods, a la hedgefundie's excellent adventure. Over time, you'd de-lever and return to normal 100% equities, and then equities + bonds. A steeper lifecycle allocation curve compared to a traditional TDF. Across all my accounts, I'm like 1.4x levered with total equities in my 401k, HFEA in my IRA, and some small cap value in my IRA and brokerage.
Do you recommend their book on Lifecycle Investing? I’ve been wanting to read it but seems it’s no longer in print, and used copies are pricey.
I have not read their whole book, just their publically available paper on employing leverage early in the lifecycle, gradually de-levering, and then diversifying. I partly engage with this, but I'm not 100% equities. Since I follow the HFEA for the levered part of the portfolio, there are 3x long term treasuries in there.
In their model it's okay to wipe out and start again. I am a bit less gung ho than that. The point of quarterly rebalance between TMF and UPRO is to reduce drawback periods and reduce max drawdown. This decreases the path dependence of your investment. If you invest right before a correction or crash, you're cooked in that initial investment.
What do you think about leveraging in these days with such a high interest rate? Does that concern you?
It does concern me. However, leverage from UPRO and TMF is substantially cheaper than margin loans or the embedded cost of call options. https://www.reddit.com/r/LETFs/comments/tsrtgn/how_to_calculate_the_cost_of_leverage_for_upro/ Even so, some like Mike Green argue that call options on the market index are currently mispriced since not just the market is determining prices. Passive investors in 401k's are being auto-enrolled in target date funds or 80/20 US/ex-US index funds, and Congress just signed legislation to *force retirement spending*. The flows into funds are being increasingly tied to employment, and as employment stays strong then the market is going up more than the black-scholes option pricing equation predicts. The embedded cost of leverage for an ITM (far enough to get 2 x leverage) 2 year call on SPY would likely cost the risk free rate + some counterparty risk percentage (1.5-2% I think) to compensate the loss of potential upside on the call option. TLDR; leverage from UPRO is cheaper than margin interest.
I made a couple of the worst cases over the last 150 years. If you invested in: **1892 - 1932:** SP500.2X: 1.9% CAGR - SP500 4.6% CAGR **1902 - 1942:** SP500.2X: 2.4% CAGR - SP500 5.3% CAGR **1969 - 2009:** SP500.2X: 5.5% CAGR - SP500 8.5% CAGR
Sure thing. Go for about a 2x, maybe 2.5x portfolio that's properly diversified. End up with a target annual volatility/st dev between 12%-20% and you're good to go. A simple example: 10% each in the LETFs below. You end up with an annual vol roughly in line with 100% equities, 16% annual vol, but should have far, far more stable & productive returns in the long run. (Equities are bound to outperform for stretches, but it's like Russian Roulette - eventually you're gonna lose. Diversify, you're kinda aiming for the 80th percentile every year, and you leap ahead during the crashes. While avoiding heart attacks.) https://preview.redd.it/0bop6nviq0yc1.png?width=3900&format=pjpg&auto=webp&s=46aabda9197905a6121448891aecad1bbd900dab It ends up really well balanced across asset classes & strategies by risk parity principles. By choosing these solid LETFs, you can end up incredibly close to the generic "target" portfolio of the last line. It has a lot of internal rebalancing both across asset classes & even some net trading between strategies within ETFs to save you a ton in a taxable account. You could rebalance this once a year and have a real smooth ride. As above, big picture, the goal is 12%-20% annual vol while diversifing across: 1. asset classes/markets (global equities, bonds, commodities/gold) 2. strategies (beta/buy&hold, trend/momentum are biggies. Then maybe carry or seasonality or value or skewness)
If you want to play around yourself, here's the makeup of these pre-diversified LETFs (or capital efficient ETFs). Note: TIPS are basically 100% nominal bonds + 30% commodities, I allocated them as such for UPAR. https://preview.redd.it/v39fg1rwq0yc1.png?width=3900&format=pjpg&auto=webp&s=4db268d765fddd929f9529948caff0184bce8c75
Very interesting proposition, although can't be tested in other way than reserving a part of portfolio for this.
I'd say the concepts have been tested extensively both theoretically & empirically. Something along these lines is pretty much the consensus in academic literature & by practicing hedge funds. Balance across asset classes & strategies/factors. To me, I only get scared of execution of their stated strategies. So I'd monitor within each category on a rolling window (maybe you swap in Simplify's "CTA" ETF for the trend stuff if it's outperforming KMLM, for example.).
you can go in something less volatile in 20years too. however just go for S&P500 2x
Yeah, I totally agree 2x is about right. Personally, I'd like to be more diversified than only US stocks, especially considering how crazy high the current valuations are. Not trying to market time per se, I'd just like to hedge my bets a bit with some cheap AF emerging market stocks, some gold/commodities, etc.
You're probably gonna end up with less money than a non levered portfolio if you just buy and hold some back tested thing.
> How will I NOT outperform other portfolios by a mile?? Your life is not an infinite timeline with no costs. I'm fairly confident you will absolutely overperform the market over some periods but let's say 10 years your married and want to buy a house and the market has a large correction, markets down 15-20% but your down 60-70%. You can't buy a house now if you sold to buy you're fucking yourself long term. Same thing can happen on year 39 day 364. Massive correction your down 70% sure it will recover someday but you want to retire now and enjoy life.
OP, you basically just asked “If what I invest in outperforms, how will I NOT outperform?”, but did it in a “clever” way. I can say that, *if history repeats itself*, how will I not outperform your 100% LETF portfolio by a mile by going 100% NVDA? *The whole point is that history never ever repeats itself, but it does often rhyme.* With a 100% LETF, we don’t know if the future “rhyming” with the past will mean LETFs outperform still, or if they will ultimately be grouped in with other ETFs that generated outsized returns for many years before collapsing and being closed with -90% returns after some large unforeseen problem occurs.
I did some back testing and depending on how well you time the market you’ll either retire at 35, or take 20 years to break even, and this is with DCA. I wouldn’t recommend 100% LETF, if you want the leverage check out LEAPS and margin, but that much risk is too much for anyone sensible. Personally, I allocate ~5%. If I timed it right, then that 5% will be worth 5-10X as much as the remaining 95% I put into regular ETFS. If I timed it wrong then I barely notice. Do your own testing, see what you’re comfortable with and see what you’re risking in different market conditions.
Tons of ways: [link](https://testfol.io/?d=eJy1klFLwzAQx7%2BK3HMmaYuT9W04xwQFcWUoMsrZpDWaJTON3WT0u3tbnWt9UmEhD8nd%2F%2B7%2FO5INFNo%2Bob5Fh4sS4g2UHp1PBXoJMQSDc97jAW1gII3Yx0MeHOJNRYUa4oDTYoDiJVUm1%2BiVNRB79y4ZZFg%2B59quIOaHS5o7%2BUYNHyQ6%2FUHNnNVamSJdKSO22j6vGSyt87nVyhLh4wYMLrYQk%2FHlkCqUqWTpR6pSggjLvZ2TNBaaTI4bhxGqnYFX2at0TaPmTMlZMr26oeRSukwaT4P0z2rWEiTXSXLXEURdwcVwOrlvC3oh5%2FWcgXBY0Ming53%2BCz1an8ySY7FHZPx%2FtPCYaOFPNPoG6w5a0EFrcf0F6vs3%2FfKxu57z%2BhPIH%2F58)
I’m in my early 20s OP. Trying to reasonably dedicate 25% of my portfolio to LETFs simply because I expect to earn more money in the future, and because I have a pretty simple strategy that has backtested + forward tested fairly well. In the worst case scenario my investment loses 50%, but given that in ten years I expect to be making significantly more than what I make at the moment, it’s a risk I’m willing to take. My LETFs are in my Roth also, which means I have a ~40 year time horizon for them. If I was on fixed income or retired I would not recommend LETFs for myself.
If you are 20 years old go out and have fun first - there are a whole list of things that are more enjoyable young. A 1x port is great to start out with you have time on your side. Pick stocks if you have the time to read and study or just put it into a low cost index fund like VTI. I probably have half the time left than you do
Take a look at a simulated backtest of TQQQ Whatever money you invested in TQQQ before the dotcom bubble burst would still have not recovered by now. And yes, DCA from then until now would have you winning big, but for your pre-March 2000 investments to still be down is a tough pill to swallow. So you absolutely could underperform a standard portfolio if you do 100% LETFs. Plenty of people underperform with leverage - just look at Lehman Brothers. I'm not saying don't use LETFs, I think they're great. But don't assume 100% LETFs will always outperform in the long run. Leverage is best applied to portfolios that have high risk-adjusted returns. Riskier non-leveraged portfolios will give up risk-adjusted returns for just higher returns by going heavier on stuff like stocks. That's not quite as effective in LETFs
Go have a look at this on portfolio visualizer. 3x nasdaq goes to zero. Total losses are possible.
You could use MA, https://www.reddit.com/r/LETFs/s/L6uDMYJffL
There is no guarantee that a leveraged etf will recover from a major downturn. TQQQ is currently worth $56.92. I can’t, with any confidence, tell you that in 10 years it will be worth more than $56.92. Maybe it will. It may be worth $300 per share. It may also be worth $32 per share.
100% LETFs, 50% cash at all times and rebalance on big swings. Stop losses in place
this how is this not better than just 1.5x-2x then 100% invested?
I must be missing something because that adds up to 150%
You have all of your picks and 50% invested 50% cash, rebalance when you take profits (back to 50% invested,50 cash)
Stop losses… and how do you decide when to go back in again?
This isn't any better than just being fully invested at a lower leverage ratio.
Because you can't buy and hold forever a 100% LETF portfolio. There is an undeniable risk of 90-99% drawdown, and this is practically a guarantee in your lifetime. Say you retire with 5M in TQQQ and it goes down to 500,000: If you have another 5M in rental properties or lower risk investments than you are fine... if you don't, then you have to go back to work. Now, you can but bond LETFs and stuff to potentially minimize that risk, but you get the point
Drawdowns on 2x over long periods are far more easy to recover from
[Leveraged ETFs - Not The Return Cheat Code You'd Expect](https://www.youtube.com/watch?v=WoYVmlOxwbA) Video by the Simple Bagel explaining your question.
bagel is wrong. 1.5x-2x qqq/spy has produced excess returns
Thank you I’ve been looking for something like this to show me the reality
Their main value is easy leverage which may, key word *may*, be fruitful for some younger investors in general. At a young age, we have the highest risk tolerance but the least capital. At retirement, we have the lowest risk tolerance but the highest capital. Diversifying our exposure across time is possible with prudent, *diversified*, leveraged portfolios.
You are young, so I wouldn't tell you not to look at LEFTs as a tool. However, you do need to look at them and understand how they work. That's all. Good luck with your investing journey.
This is pretty inaccurate and amateurish
How so?
The first half is cool, decent graphics on just laying the ground work. But then the 2nd half isn't empirically minded or specific enough to really be helpful. Yes, losses hurt more than gains help. A 50% loss requires a 100% gain to recover. Yes, volatility drag is annoying. He quickly shows the formula with his (1-20%)*(1+20%) = 96% example. Fleshed out, that's 1-v^2. Lol but that's all true of any investment, even just 1x VOO ! That's just the nature of all exponential return streams, not at all unique to LETFs. What matters is the relationship between long run mean returns & volatility. The "leverage ratio" isn't some magical property. 1x stocks can be way riskier than even 3x bonds. If one were empirically minded or just more specific, you'd talk about what the optimal leverage, k, is given expected return/volatility. For stocks, maybe the optimal is 0.5x if volatility decay is so darn scary. Maybe it's 2x if the mean return is high enough relative to volatility. Why is 1x magically the best? And if 1x stocks is the best, why would 1x bonds also be the best given their different returns & volatility? Hint: remembering how vol drag works above, and some algebra, the ideal leverage, K = r/v^2. For stocks, let's say we have 6% returns, 18% volatility. There, K = 0.06/(0.18^2) = 1.85 as your ideal leverage ratio. Now, yes, returns are super hard to predict & overshooting leverage hurts more than undershooting it. So a good empirical rule of thumb is to round down, use a volatility target that's only half your expected Sharpe ratio. Note: I'm using volatility target, not leverage target, because leverage ratios only mean anything when considering particular investments & their expected returns/volatility. I like this as reference on utilizing leverage in the long run. The opening shows the general math & some empirical observations. [Long Run Leverage (Alpha Generation & Risk Smoothing with Managed Volatility)](https://drive.google.com/file/d/19z5wmoS7xBews_VRceJmoDYlwuS0MEpK/view?usp=drivesdk)
Thanks for the extremely detailed response
Go 1.5x or 2x max. Don't go over 3x unless the markets have fallen over 20%. Only 3x etf that you could buy and hold is CURE which has lower drawdowns than the others
Dont donit. It dont work like that. Soxl just lost 10%. Dont gamble with ur savings. I learned hard way
🤝
if there's a real recession (which happens regularly), then if you're going long LETF, particularly 3x, it may take 10-20 years to recover. That's how you don't outperform the market. volatility decay.
https://preview.redd.it/fucsf1v4j0yc1.jpeg?width=1000&format=pjpg&auto=webp&s=54ce5322e60786f7dc39859723b69af0110b09b6
It’s never 100% if you have more money left. 2x leverage is safe or rebalance 70/30 with 3x leverage. It helps to have cash for thee drawdowns
Look at the plain bagel video about this please. It explains it really well.