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

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

Post by Indexinvestor » Wed Aug 17, 2016 10:32 am

Hi all,

My first post :-)
I am new to this forum and invested in the HBPP using ETF's since a couple of years back.
I think I read this thread from start to finish about 3 times now....and I am hooked to say the least. Thank you for all your contributions and a special thanks to KBG!
I am in my "asset growth years" so to speak and I am contemplating doing the 3xETF version that KBG is talking about: 50% SHY, 16.7% SPXL, 16.7% TMF, 16.7% UGLD ie the 2x.
As I understand it backtests quite well and if a total meltdown is coming I will still be standing with 50% cash.
My dilemma is how much of my total portfolio I should allocate to the above? I am not thinking of doing it only as a VP but to a greater extent...
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Kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Aug 17, 2016 11:07 am

Please, consider it a VP and not a PP. Personally, I would start out small and wait for a really bad drawdown to see if you actually can take the volatility...and I highly recommend you not look at the individual elements, just look at the portfolio bottom line ups and downs
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Re: 20% annual returns over 40 years...interested?

Post by Indexinvestor » Wed Aug 17, 2016 1:05 pm

Hi KBG...thanks for a quick response.
For me the individual asset classes do not matter at all...why should they? Its like having a portfolio of stocks and rank the overall performance on the least performing stock?
I definately can take the volatility....have done so some years ago with a 100% stock portfolio..
Contrary to my previous portfolios I like the max drawdown aspect and yet a considerable upside.
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Wed Aug 17, 2016 1:40 pm

Indexinvestor,

Don't do it! If you have researched the 2x/3x enough you'll see things like below, and will have read about decay.

YTD, woo hoo, look at that NUGT go! (Miners 3x). Looks like a great deal, right?

Image

Then look at 5 year. Both are near zero from the starting level

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

Post by iwealth » Wed Aug 17, 2016 1:58 pm

Also keep in mind that a falling 3x leveraged instrument will approach zero rather quickly so if the underlying asset rebounds, you will not participate in proportionate gains.

Quick example:

If the underlying asset price is 100 and it falls 30% to 70 then rises 50% to 105.
The 3x ETF is 100 and it falls 90% to 10 then rises 150% to only 25.

The only way you can track a 2x PP is if you frequently rebalance the 3x ETFs and keep them at 50% of your total portfolio. And if the 3x ETFs are all falling at the same time, you will be eating into your cash pile rather quickly.
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Wed Aug 17, 2016 2:12 pm

Good example.

What I tried once and made minimal money, not worth the effort, was to short two competing instruments. So you could short DUST and NUGT and take advantage of the decay. But many of these are not available for shorting, or if they are have shorting fees/expenses, so those costs ate into profits.

I did it with UCO and SCO. And found I could make a little. but eventually they get unbalanced, so you still have to watch too closely for my taste.

AND, you also need to start out when the funds are fresh or split to make them more even. Doing this strategy now with DUST at $5 and NUGT at $154, well, they are already severely unbalanced.

Go to the casino or track instead, at least you'll enjoy yourself for a while as you are losing money. :D
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Wed Aug 17, 2016 2:39 pm

Hasn't kbg already shown that for trending non/inversely correlated assets, the decay actually works in your favor? I'd be most worried when all PP assets are in a sideways market.
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Re: 20% annual returns over 40 years...interested?

Post by iwealth » Wed Aug 17, 2016 2:50 pm

mukramesh wrote:Hasn't kbg already shown that for trending non/inversely correlated assets, the decay actually works in your favor? I'd be most worried when all PP assets are in a sideways market.
The problem is that these correlations are not consistent and positive correlations between assets can last for extended periods of time.

I can assure you that there will be extended periods where 2 of 3 or all 3 volatile asset classes rise and fall at the same time.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Aug 17, 2016 2:50 pm

Cartopassi, interesting, but not really relevant. A totally different asset. Again, for like the 1000th time, it is the portfolio composition that matters most. Not, repeat not for the 1000th time, the individual assets.

But hey just for fun...let's toss UGLD and go with NUGT as our gold element. In other words, 16.66% goes to NUGT every year instead of UGLD

1/1/12 to yesterday

UGLD: CAGR 9.21/MDD -16.62
NUGT: 15.54/-31.92

2012,13,15 not impressive...this year the NUGT port is up 98.9%. Having noted this, the portfolio performance CAGR was -.5 on 12/31/16. I doubt most people would hang for that kind of performance.

CAGR of NUGT Port based on start date and ending on 12/13/15
2011: 1.95
2012: -.50
2013: -2.84
2014: -2.56
2015: -16.85

PPs 2012-2016 CAGR/TotRtn/MaxDD

1x 4.80/24.20/-7.97
3x 9.21/50.29/-16.62
NUGT 15.54/95.00/-31.92

And my personal favorite: 75% cash and 8.33% to the rest...5.08/25.74/-8.47. I have zero doubt in my mind this version is a better and safer version than the original. It is literally impossible for this portfolio to have a worse annual return than the PP's full backtest history if rebalanced annually. Not to mention 75% could be sitting in STTs.

But to be clear, I've never said this (50%/16.66%) was a safe leveraged version of the PP. I do believe it has a good chance of returning stock like returns with less Max DD. Using PortViz data I have a rolling 10 year (1971 start date) return max of 26.41, avg of 18.16, and min of 12.84. As of 12/31/15 the rolling 10 year return was 13.83%. The worst annual DD was -12.3%. But of course this is not intraday MaxDD. I had a ~18% DD in 2015.

This compares with a 100% stock port that had a max 10 year rolling of 16.90, an average of 9.16, and a min of -1% whose max annual DD was 38.5. Intraday was at least 57%. If we do a 60 stock/40 10Y Ts the rolling stats are 16.46/10.77/3.16. The worst annual Max DD was -14.74%.

Now tell me, objectively, which is the better portfolio of the three?
Last edited by Kbg on Wed Aug 17, 2016 2:51 pm, edited 1 time in total.
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Re: 20% annual returns over 40 years...interested?

Post by iwealth » Wed Aug 17, 2016 2:51 pm

Cortopassi wrote:Good example.
AND, you also need to start out when the funds are fresh or split to make them more even. Doing this strategy now with DUST at $5 and NUGT at $154, well, they are already severely unbalanced.
Due to the nature of these instruments, this should not matter as long as you buy equivalent monetary amounts.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Aug 17, 2016 3:13 pm

iwealth wrote: The problem is that these correlations are not consistent and positive correlations between assets can last for extended periods of time.

I can assure you that there will be extended periods where 2 of 3 or all 3 volatile asset classes rise and fall at the same time.
Correlation has nothing to do with the decay factor which absolutely is real.

The issue, above all, for decay is trendiness. All three of the PP assets trend well which is why they are in the portfolio in the first place. For the same reason HB stuck them in the port, we are counting on the ability to trend well. I'm not going to post this again (though I just did), but if you look at the actual data vs. the crap you read somewhere you will see that with this particular portfolio the trendiness is such that it can overcome the decay. Read carefully...I'm not discounting decay. I'm saying these assets can overcome/make up for it when they trend. On average, the real portfolio has come very close to it's advertised 2x leverage factor. The data also indicates we ARE getting nicked a bit for decay, but it's quite minor.

I've also mentioned this before, but if one is actually going to attempt this they really should take the eye poking time required to understand the math behind these ETFs and what it means from a practical stand point. It's on the internet and at the ETF sponsoring company websites. If one does this, they will understand why a short 3x ETF and shorting these ETFs in general is not a particularly good idea.

But folks, do me/us all a favor...don't knock this portfolio for attributes you praise on other parts of the board. Leverage, decay, derivatives, fair game. Negative/low correlations, volatility, all-weather attributes...isn't that why you are here and not so much? If the latter are your concerns then the standard PP isn't good for you either.
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Wed Aug 17, 2016 3:15 pm

Kbg wrote:Cartopassi, interesting, but not really relevant. A totally different asset. Again, for like the 1000th time, it is the portfolio composition that matters most. Not, repeat not for the 1000th time, the individual assets.
Now tell me, objectively, which is the better portfolio of the three?
And from before: 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.

----------------

I am in the bolded boat. That would kill me. I love to see the day to day interplay of stocks vs. bonds vs. gold. But to watch one or more of those 3x ETFs go to zero while the other zoomed is not for me, regardless if the bottom line is higher.

I appreciate all the math and work you've put into this. 15 years ago, I probably would have tried it. Not now though.
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