maxmaher
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Buy Alert - An Experiment
🕑 Added 2022-01-28 17:58:12 +0000 UTCI have been working on a fascinating video project on a fellow who goes by the name Hedgefundie. He came up with a strategy to use a combination of ETFs and Bonds that beats the market with back tests since 1955.
The Idea:
Find a way to invest in leveraged ETFs that limits downside risk.
The Problem:
It is possible to buy an ETF that mimics something like the S&P 500 but with 3X leverage. This means if the market goes up 1% you make 3% (and the reverse is also true).
You may think off hand that this would be an obvious investment because the S&P is great over time, so why not triple that?
Well, it doesn't really work that way. Due to something called volatility decay you actually end up making less money holding a leveraged ETF over long periods of time when compared to the market.
This is because once in a decade dips in the market can wipe your portfolio down by 60-70% where the market goes down 20-25%. That massive loss of 60-70% then can take many years to recover.
Because of this, it was proposed that the downside risk can be mitigated by purchasing a portfolio of 55% UPRO (3X leveraged S&P 500) and 45% TMF (3X 20 year treasury bond ETF). This is then rebalanced quarterly.
The Result:
-When the stock market is up your stock ETF does exceedingly well
-When the stock market is down your bonds do exceedingly well
-Rebalancing the portfolio helps to hedge against risk
-The idea returned 48% more than the S&P over a 65 year period
More here: https://www.bogleheads.org/forum/viewtopic.php?p=4426310#p4426310
I have been wanting to load up on an index fund during this recent dip so I decided to try out this strategy with $100k.
Warning: Just because back tests show something works well, it does NOT guarantee that the future will be the same. Leveraged ETFs are typically only reserved for short term trading so this is a higher risk strategy. For example if the S&P somehow dropped 34% in a day, that position would be wiped out completely due to leverage.
I decided to add this to my strategy because I feel comfortable in my existing safe investments so please do your own research as well.
If you're looking for a less risky strategy now may be a good time to look at non-leveraged ETFs since many markets are down.
*None of this is financial advice. Please please do your own research*
If you're still confused on this I will also have a video coming out on in within a few weeks that will make things more clear
Comments
Is there a way to mimic this in a traditional 401k?
By rebalancing you are buying and selling according to the market but more in the past tense. By this I mean that if the market did extremely well in the last quarter and your current ratio goes from 60% stocks to making up 72% you would sell off shares, (I look at it as taking profit), on that 12% increase and buy bonds with it to make it once again a 60/40 balance. If at the end of the next quarter the market took a dip and your stocks are at a 55% ratio you would then buy the dip by selling enough bonds to once again create the 60/40 ratio.
Can you tell us more about rebalancing? I mean we as holders of ETF/BOND should sell and buy accordingly according to the market situation? Can you please provide more details here ?
Patti Murphy
I think most of this info. is over every bodies heads..we are simpletons.
Interesting! Thanks
Hi Max and the Gang; I would recommend (I do not have any affiliation but I am a customer since about 1 1/2 years) "The 12% Solution" by David Alan Carter; it offers an investing strategy with a 60/40 mix between the strongest (3 months relative strength) ETF on US stocks (like SPY, QQQ, IWM) and the strongest (same as above) Bond ETF (JNK, TLT) with a monthly rebalance. The performances are better than SPX and the drawdown is less. Ciao
the goal is for the ratio to remain 55% Stock / 45% Bond If at the end of a quarter it is 60/40 that would mean some stocks would be sold to purchase more bonds to land it at 55/45 again
“ This is then rebalanced quarterly”… can you unpack that a little bit?
Yeah haha pretty wild stuff!
Jay
That sounds really interesting. Never heard of that strategy
