20% annual returns over 40 years...interested?

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Kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Jun 07, 2016 10:41 pm

MG,

SSFs are good for SPY and GLD for sure if you go long duration and hold to term. Not so great for less liquid stuff and TLT is a non-starter in the SSF world.

With regard to a 50% DD at the portfolio level, I guess if a meteor hits us then there is no recovery...but the odds of LTT, gold and stocks all crashing at the same time are extremely slim. Additionally, all you need is one ETF to run opposite to the crashing one and with a very high probability the net portfolio effect will be positive.

With a hefty amount of leverage and negatively/minimally correlated assets a lot of "normal" goes completely out the window when rolled up to the portfolio level. The asymmetry is logrithmic BOTH ways which makes for some interesting results. Check out TLT and TMF and for 2013 and 2014. Is there any doubt which option was better?

Last year the 2x PP I track had a 16% DD and this year it has recovered and then some. I started the leveraged PP Jan 2104 and backtested I have slightly better than 2x PP returns with slightly more max DD when doubled. Cumulative backtest return is 23% my live return is 29% which is completely due to rebalancing.

Shawn...no problem. Hopefully it is helpful.

With regard to the future, I plan on looking more closely at SSFs and options to maintain the leverage. Unfortunately (maybe fortunately) a good run will not be compounded and we won't get the benefit of log decreases either. Looking at the most distant SPY leap options one could sell the put and buy the 210 call for a credit of $470. Options and SSFs are going to be tough if not impossible for smaller accounts though.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Tue Jun 07, 2016 11:06 pm

Kbg wrote:With regard to a 50% DD at the portfolio level, I guess if a meteor hits us then there is no recovery...but the odds of LTT, gold and stocks all crashing at the same time are extremely slim. Additionally, all you need is one ETF to run opposite to the crashing one and with a very high probability the net portfolio effect will be positive.
So out of 48 years of PP history, 1 out 48 is a 2.03% chance of -50%. I wouldn't call that "extremely slim". Too imprecise. Lets focus on someting more reliable:

Image

So -56.28% at 99% confidence and probably would be -60%ish in reality to allow for tracking error. So that means the 2x PP would have had to earn about 160% in gains just to get back to breakeven. We know the regular PP did that in about 2.25 years. Does the same hold true for the 2x?

And of course the other unanswered question is since thse kind of MaxDD is similar to what the market regularly experiences, does a 2x PP still win out? I would think so since the market has sucked since March 2000 returning only about 4.5% CAGR.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Jun 07, 2016 11:10 pm

MG,

If you have some starting and ending prices for the DD phase, followed by the recovery phase we can do a rough estimate to answer the question.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Tue Jun 07, 2016 11:22 pm

Kbg wrote:MG,

If you have some starting and ending prices for the DD phase, followed by the recovery phase we can do a rough estimate to answer the question.
It's actually on the forum somewhere, but I've no idea where it is!
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Wed Jun 08, 2016 9:41 am

Here is a ProShares statement regarding.....

http://www.proshares.com/news/statement ... posal.html

Will ProShares be able to continue to offer 2x or 3x funds under this proposed rule?
We are highly confident that we will be able to continue to offer and manage our 2x and inverse 2x mutual funds and ETFs consistent with their investment objectives under the rule as proposed. We are continuing to explore whether it will be possible to manage our 3x and inverse 3x funds under the proposed rule. These funds are valuable tools used by knowledgeable investors to help manage risk and enhance returns. If ultimately 3x funds can no longer be offered under the new regulatory regime it would be harmful to investors.
I thought the proposed rule caps leverage at 1.5x. How can ProShares continue to offer 2x and inverse 2x funds in this scenario?
It is very important to clarify that the SEC has NOT proposed limiting the total exposure of a fund. Rather, the SEC has proposed limiting to 150% of net assets the exposure a fund can obtain through the use of derivatives. This means that ProShares can offer 2x and inverse 2x funds that obtain exposure through a combination of derivatives and other holdings, such as equities, which is actually how ProShares manages many of its geared funds today.
Did the SEC contemplate the continued offering of 2x funds?
The SEC specifically stated in the proposal that methods are available to achieve a 2x investment objective consistent with the proposed rule.
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Wed Jun 08, 2016 9:54 am

I have been using 2x and 3x ETF's for some time, and rather effectively. I limit my total portfolio exposure to 2x, even when I use 3x ETF's (liquidity reasons TMF and UGLD over UBT and UGL).

From what I can tell, 3x ETF's may go away, but 2x should be able to operate under the rules. I would see 2x ETF's increasing in liquidity after the 3x funds close.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Jun 08, 2016 11:10 am

Thanks for the post Clacy!
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Fri Jun 24, 2016 9:41 pm

How might things play out with the existing 3X ETFs if the rule goes through? Do their movements start diverging from the typical multiplier of the target index and plummet as people sell looking ahead to some shutdown date? I was getting close to pulling the trigger on a VP with the 3X ETFs before the SEC announced this. :-\
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Jun 24, 2016 11:31 pm

Mr Vacuum wrote:How might things play out with the existing 3X ETFs if the rule goes through? Do their movements start diverging from the typical multiplier of the target index and plummet as people sell looking ahead to some shutdown date? I was getting close to pulling the trigger on a VP with the 3X ETFs before the SEC announced this. :-\
I'm not that worried...you are going to get cashed out at the appropriate market price if they fold and you hold til the last day. The thing to watch are the spreads. If they get bad either hold til the end or ease out by using a market on close order (assuming liquidity is ok for whatever size you are trading).

Personally I plan on/am watching and will tactically adjust as I think best. Of interest, UBTs spread was way more narrow today than it normally is. It was either a Brexit thing or perhaps volume is picking up in anticipation of the change.

But yeah, liquidity may dry up and put you in a bad way if you want to trade for some reason.

BL: inconvenient, likely. Unsafe (for a 3x ETF) no. And do your own due diligence, don't just read this post and make a decision.
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Sat Jun 25, 2016 7:00 am

Thanks for the info as always, Kbg. This is a great thread.

Nice thing about an index there is always the underlying security to cash out, so that makes sense. And the reminder about liquidity in these things is always well taken. I will continue to watch and learn.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Jun 27, 2016 11:42 am

UBT spreads are back to being wide.

UBT spread .44%
TMF spread .13%

...as measured against the ask
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Jun 30, 2016 10:13 pm

For a 100K portfolio...

2.5x means 250K equivalent/25% each to SHY, TMF, UGLD, and SPXL/25K SHY and 225K (75K x3) equivalent everything else

2x means 200K equivalent/16.667 each to the above and 50% to SHY/50K SHY and 150K (50K x3) equivalent everything else

1.5x means 150K equivalent/8.333% each to the above and 75% to SHY/75K SHY and 75K (25K x3) equivalent everything else

1x means 100K/25% each to SHY, TLT, GLD, SPY

Purchase price was at the close 12/31/15 through the close on 6/30/16

2.5x = 35.38%/-5.21%DD

2x = 24.02%/-3.77%DD

1.5x = 12.69%/-2.13%DD

1x = 11.47%/-1.43%DD

Personal mix = 27.74%

Comment: The port is now at an all time (backtest) high. Wow. 8)
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Re: 20% annual returns over 40 years...interested?

Post by ozzy » Thu Jun 30, 2016 10:44 pm

Wow is right my friend! Happy days are hear again...! ;D
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Jul 01, 2016 10:59 pm

I tightened up my rebalance bands from 50% to 33%, as a result I rebalanced my stock portion today with the proceeds going to SHY. TMF and UGLD were not sufficiently out of balance to rebalance them. Of note, I rebalanced into stocks back on Feb 8 which is the main reason stocks needed to be rebalanced. TNA is up 80% and SPXL is up 55% from the Feb low.

A rebalance now comes at 11% and 22% instead of 8.5% and 25%. By way of full disclosure I will tactically rebalance once a threshold has been hit. By this I mean if a particular asset is trending hard one way or another I will wait and rebalance when I think a potential leveling off is occurring. In any event, a band threshold must be hit.

2016 has been a good year for volatility harvesting which I've tried to take advantage of.
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Re: 20% annual returns over 40 years...interested?

Post by Sam Brazil » Sat Jul 02, 2016 1:47 pm

Kbg wrote:Comment: The port is now at an all time (backtest) high. Wow. 8)
Oh, that gives me heart burn... Even as I tell myself this cannot be timed, mean reversion is real, and so whenever I hear all time high I think, "Great, now there is some very real high probability of this thing going down in the near future, although I'm supposed to act as though mean reversion doesn't exist."
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Wed Jul 06, 2016 11:06 am

Man I hope I hit a rebalance band soon. It's getting up there, but all the volatile assets are up a similar amount since my last rebalance. Likely "cash" will hit the lower band if these trends continue
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Jul 06, 2016 2:57 pm

A couple of thoughts on the last two posts...

1. All portfolios are usually in draw down 70+% of the time. What we look for in a great portfolio is for the next peak and trough to be higher than the previous peak and trough. We get worried when that is not the case or that it takes an inordinately long amount of time to do so.

2. Personally for me, the best rebalance is a rebalance that adds mostly to cash. If the cash kitty is increasing things are working and total assets are increasing. If the cash kitty isn't increasing, we are just juggling stock, LTT and gold balls up and down.

In a 3xETF PP (unless all 3 of the non-cash wheels fall off the bus), we gain comparatively more and lose comparatively less when assets trend well. Additionally, we are able to harvest volatility more effectively (by doing it more often) than in a normal PP. We risk negative returns when assets are flat and horrifying losses if 3 of the wheels fall off the bus simultaneously in exchange for the advantages. In keeping with a core PP philosophy, we do not pretend to know what the market is going to do, so we either rebalance annually or when we hit our pre-designated bands. Our main purpose for rebalancing is to keep us reasonably close to our index bogey (a normal PP), but using leverage we hope to profit just a little bit from volatility harvesting.

But what we care about most about is that we are getting 2x the returns per our leverage target. How we doing on that count?

PP Start Date Leverage/Non Leverage CAGR (Rebalance annually)

2012 9.71/4.93
2013 10.13/4.71
2014 14.38/7.53
2015 9.95/5.92
2016 27.27/12.62

Max DD from 2012 -16.54/-6.93

Looking good thus far...even if you started in 2015.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Jul 06, 2016 4:06 pm

What I still find to be the most interesting portfolio of all is the 1x PP using 3x ETFs

Same rules as above since 2012 CAGR/MaxDD

3xETF version 5.38/-8.43

Normal version 4.93/-7.94

But just for fun let's take the worst year ever (1981) for the PP according to Portfolio Analyzer and see what happens to a 10K Portfolio. According to PA PP lost 6.13% at year's end (nominal).

STTs returned 10.59%
LTTs returned 1.64%
Stocks returned -3.88%
Gold returned - 32.87%

Now assign $7500 to STTs and 833.33 to the rest. Next magnify the bottom 3 by 3 and we get a 10.59% return for STTs and 4.92%, -11.64% and -98.61% for the remainder in order. Notice gold was essentially wiped out. Do some basic math and we get 8294.25 + 874.33 + 736.33 + 11.58 = 9916.49 at the end of the year.

In other words a .83% loss.

So let's make our nightmare even worse and assume STTs were giving us an awesome .6% return as they are today (roughly) with the other asset classes returning what they did leveraged. Total loss: 8.33% Not great but not awful either.

Of course let's have some fun too using the same data and approach for 1982...I'll spare you the math but a normal PP was up 24.02% while the 1x 3xETF version was up 34.49%. That's a huge difference. In 1981 gold basically went to zero leveraged. In 1982 LTTs went up 120% leveraged. Pretty extreme for sure but the important point here is that in a regular PP LTTs returned 40% to gold's 32% loss in 1981, while the leveraged version returned 120% for 0%.

One last excursion...what about our 2x version. 1981 -13%, 1982 +48%...good math when you can get it.
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Wed Jul 06, 2016 7:30 pm

Kbg, you're on fire in multiple threads. Thanks for the thought provoking math. Keep em coming.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Jul 06, 2016 7:49 pm

Mr Vacuum wrote:Kbg, you're on fire in multiple threads. Thanks for the thought provoking math. Keep em coming.
Thanks. I worry about folks plunging into the 2x version without doing personal due diligence to really understand the risks. A 3x PP could have an extremely bad year, this MUST be understood. But I have to say, if I were doing a non-leveraged PP there is no doubt in my mind I would do it artificially with 3x ETFs. I honestly believe it is better both from a performance perspective and substantially safer overall. Full disclosure: in the proverbial SHTF scenario I think gold doesn't do much for you so I'm entirely comfortable with the paper version of it.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Wed Jul 06, 2016 9:42 pm

Kbg wrote:Thanks. I worry about folks plunging into the 2x version without doing personal due diligence to really understand the risks. A 3x PP could have an extremely bad year, this MUST be understood. But I have to say, if I were doing a non-leveraged PP there is no doubt in my mind I would do it artificially with 3x ETFs. I honestly believe it is better both from a performance perspective and substantially safer overall. Full disclosure: in the proverbial SHTF scenario I think gold doesn't do much for you so I'm entirely comfortable with the paper version of it.
Oh, I'd love to see the intrayear drawdowns on those 2x and 3x PP's... no one is going to stick with them through 50%-75% declines. You'd truly need balls of steel!!!

And worse, because these are derivative funds that are derivatives of the issuer using derivatives in he portfolio, counterparty risk is all over the map and will jump out the window in a crisis. Do we need to recall that Lehman went bankrupt and had to sell their iShares to Barclay's which then sold them to Blackrock? What if there isn't a ready or willing buyer next time.

I'll take my gold that I can fondle.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Jul 06, 2016 10:51 pm

I assume we all know the difference between an ETN and an ETF, of which TMF, UGLD and SPXL are all ETFs. We've also discussed the assets held by these ETFs and what is actually exchanged for what back several pages. Unless someone has their stock exposure via 500 stock certificates held in the vault of their choice, SPXL, UGLD and TMF are marginally more risky than buying SPY, VTI or an other broad index large cap funds.

With regard to the DD's are you talking portfolio level or individual element? A casual review of annual asset returns and the specific example I posted clearly indicates that an asset can and will go to zero in a year's time. If one can't keep their eyes off a component's bottom line vs. the portfolio's bottom line, then absolutely do not put a dime in this. There are a lot of posters on the board who I am quite sure should never ever invest in this VP PP because they seem quite incapable of seeing the forest for the trees.

You've got the data to simulate the worst intraday DD of a 50% or 75% cash portfolio with 3x leveraged at 16.66 and 8.33 respectively. Post the results. We would all love to see them. If you don't want to, send me the data and I'll do the simulation.

Of note, 2013 and 2015 were pretty crappy years for the PP and the leveraged port has done just fine and delivered the expected returns.

One of the things about this PP variation is that people do not think sufficiently about the positive aspects of daily resetting leveraged ETFs when you hook a good trend. For whatever reasons we gravitate to the risk of them...which is definitely a prudent thing to do. However, one should also spend some time contemplating what happens when you hook a good trend.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Wed Jul 06, 2016 11:33 pm

since it's a 3x daily fund, does the intraday really matter (any more than a 1x fund)?

I like the idea of a 1x PP with 3x ETFs, but I'm not sure I could sit on all that cash. Right now, I sit on 50% cash (so a 2x total exposure) and even with that I'm thinking "man, if only I had that 50% invested!"
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Jul 07, 2016 8:41 am

DC,

One can define the portfolio anyway they want, but if defined differently then the risk characteristics change greatly. In the 1981 example cash was (and is) the volatility smoother. One could eliminate the cash entirely but the ride is now going to be extremely bumpy and have some really bad years.

One mental gymnastic would be to limit the 3x no cash version to a percent of your portfolio, but as MG said expect huge intraday DDs. In 2015 the version I do with cash had an 18% DD. And as I very clearly mention one asset will go to zero not infrequently...so with no cash I can categorically say 33% DDs will not be unusual. Let's say you limit a no cash to 20% of your portfolio then - 6.67% isn't so bad. From a technical perspective the main problem with no cash is no reserve to buy when prices are down without canabalizing another asset. In my two rebalances this year the first was basically a "juggle" as mentioned in my post a couple above. It was only this latest that added to cash...which means forward traction in portfolio size.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Thu Jul 07, 2016 12:00 pm

Yeah, I understand the value of cash. Right now I'm only doing this 2x PP as a small percentage of my portfolio anyways. But if I had 75% cash I would be tempted to overleverage
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