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

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stuper1
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Re: 20% annual returns over 40 years...interested?

Post by stuper1 » Wed Aug 17, 2016 3:20 pm

Kbg,

I apologize, because I think I've asked this before, but could you please tell me again. If someone wanted to run one of these portfolios, like the 75/8/8/8 or the 50/17/17/17, how often would they need to check in on things and potentially do a re-balance? Is this something you have to check on weekly or monthly? Or is it more like the PP where you don't have to worry even if you only check in every year or so?

Also, can you give us a feel for how many rebalancing transactions per year might be required, so we can have a feel for potential transaction costs?
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Kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Aug 17, 2016 3:29 pm

With regard to decay...as board members may have noticed I mentioned in an earlier post that I'm paper tracking a futures based version of the portfolio. This will effectively eliminate decay as an issue but requires more work to maintain. Currently, this port is up over 2% since mid-July on a min size port of around $48K. I am not accounting for any returns from the pure cash balance in this study. The one issue I've ran into is the MGC mini gold future. Supposedly it expires on the 29th, but it appears to effectively have stopped trading on the 1st.

Anyone ever traded this future? I'm confused.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Aug 17, 2016 4:38 pm

stuper1 wrote:Kbg,

I apologize, because I think I've asked this before, but could you please tell me again. If someone wanted to run one of these portfolios, like the 75/8/8/8 or the 50/17/17/17, how often would they need to check in on things and potentially do a re-balance? Is this something you have to check on weekly or monthly? Or is it more like the PP where you don't have to worry even if you only check in every year or so?

Also, can you give us a feel for how many rebalancing transactions per year might be required, so we can have a feel for potential transaction costs?
On the first, I'd spend the same amount of time as you would the standard version. You could pretty much forget about it if that is your style. Personally, I would rebalance annually as that enables you to monetize the volatility of the assets. If you use bands to rebalance then assuming you are going to do the standard 15-35 then of course that means 5 and 11.67.

With the second one that is a little more difficult. I actively manage it and rebalance on major dives in an asset. Whether that ends up being a good idea or not, IDK. Last year it would have and this year thus far it has been a good idea. However, if something is trending down hard for a good fundamental reason I'd probably wait to rebalance...but I'm more of an active vice passive investor. If you are passive, then once a year. Once a year is what I post the stats on for performance and DD.

Please realize, if you go the more aggressive route you are in fact investing/trading a leveraged portfolio with the good and evil that comes with it. A tight money situation is going to suck even worse for this portfolio than a standard PP. Also, as I've posted a couple of times if you can't handle an asset going to zero this is MOST DEFINITELY NOT for you. The history shows this is a relatively frequent occurrence. So the standard this is for information/education purposes only; I am not a registered advisor and investors should seek professional assistance; Historical returns are no guarantee of future returns; apply.

Also, realize you can dial the cash to leverage at whatever level is comfortable/appropriate to your situation. I categorically do not recommend anything above 2x and I heartily recommend a large cash balance for volatility dampening and a pool of reserves for buying. If one wants to dial in leverage more specifically to their risk tolerance then the numbers are as follows:

Lev % 3xETF
1.00 - 8.33
1.25 - 10.42
1.33 - 11.11
1.50 - 12.5
1.67 - 13.92
1.75 - 14.59
2.00 - 16.67

2012-2016 Performance in order of the above
5.12/-8.48
6.20/-10.57
6.55/-11.27
7.25/-12.62
7.96/-14.00
8.29/-14.63
9.29/-16.60

Standard PP 4.84/-7.97
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Kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Aug 18, 2016 12:32 am

I'll be the first to say this is not a PP, just a PP inspired VP. I wish I could fast forward 5 more years to see how the 75% cash version does. The end of 2016 will be 5 full years.
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Fri Aug 19, 2016 12:54 pm

kbg, does your personal mix still include XIV? If so, can you describe how much what this is supposed to add to the leveraged PP?
I'm sure you've already explained this but I am having a hard time finding the post in this thread...
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 19, 2016 2:20 pm

M,

I have 5% of my personal mix in XIV and it comes out of the 50% cash. So cash is actually at 45%. Other options would be to nick the other three 1.67% or take it from the stock allocation. The latter would be most apples to apples but really XIV is a completely different risk premium (carry) as it is effectively continuous put selling.

I really debated pulling it from the port as most likely the short VIX selling type of strategies have seen their best days. The market in VIX futures has become WAY more efficient than the early days. XIV/SVXY are highly correlated with stocks and the leverage is roughly around a 3x ETF so one could make some very sound arguments that there isn't much value added over SPXL/UPRO. I would not debate that viewpoint strenuously. I have a small piece of it for the carry premium diversity and because it does very well in a flat choppy market (like now) whereas nothing else really does. So it gives just a tiny bit of diversification. Another more mellow option is ZIV or somewhere in between with both XIV and ZIV.

Note: XIV is highly risky stuff in a market that continues to evolve, be careful out there.
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Fri Aug 19, 2016 5:01 pm

My understanding is that in a flat market, XIV will do very well. But in a situation where stocks are dropping, won't holding XIV magnify your losses?
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Fri Aug 19, 2016 7:59 pm

Yes indeed. I think the simulated Max DD is like 95%. On the flip side it can do 300-600% multi-year runs afterward. One fallacy people often succumb to is looking at the scary figures/internet warnings that say if you go down 95% it will take a 900% rise to recover. (Or whatever the math is) This mathmatically is a hard truth but the real question is, is that all of your money or do you have a means to recharge the shot?

If no, you're screwed. If yes, then a 2-6x return on the initial loss over the next couple of years makes it a whole different equation...but you must have the spare cash to recharge. Lose a $100 make it back 50 years later not so great. Lose 100 make 300 a couple of years later, that's a worthy bet.

Obviously the rebound returns are critical to the scheme. Losing 95% and having follow on years of 10/20% isn't going to cut it.

This is NOT a port to do without a nice cash cushion. It's an essential element.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Aug 25, 2016 10:45 pm

I've been monitoring the hedged futures version of the PP for a month plus now and for those who are comfortable with and understand futures, I would have no problem recommending this approach in lieu of 3x ETF versions. Indeed, there is a very high probability I may switch to it and ditch the 3x ETF version. Costs will be substantially lower, volatility decay will not be an issue (but that could be bad in a good trend) and tax treatment is vastly superior in a taxable account. Some quick details on the paper portfolio:

My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)

Ticker symbols are...

Gold - MGC

Stocks - Long ES/Short YM

LTTs - Long UB/Short ZB

Precision balancing can be accomplished with GLD, SPY, DIA and TLT or one of their leveraged versions.

Assuming the max historical DD of the PP plus a little fudge factor, a minimum of $15K cash would be needed for this size portfolio. Notch cash up to $24.7K for a 2x VPPP.

The above combination was chosen to determine the minimum size portfolio practicable for doing a leveraged VPPP with futures but there are certainly many other possibilities and combinations that may be more suitable depending on individual circumstances and portfolio size. Additionally, there will be tracking error due to hedging as a way to enable a smaller portfolio. If you have the chops for a much larger portfolio the hedging aspect could be eliminated. See my post a while back on portfolio size using futures. Short version: UB is the long pole in the tent due to contract size. On the positive side, hedging directly will also substantially limit the likelihood of getting blown out of the water during a market spike caused by black swan or grey swan kind of events. If one wants to sleep better at night, I'd definitely hedge but of course that costs a bit more in commission and spreads.

Bottom line: A viable approach with some nice advantages. More work and a good understanding of futures required to pull it off in practical terms.

I will not be posting on this version any longer as the learning objective is completed.
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Fri Aug 26, 2016 7:59 am

Kbg wrote: My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)
As one who doesn't understand futures, does this mean you are leveraged 7.8x?

So if/when Yellen comes and opens her mouth and gold, for example, dumps $100 instantly, what happens? Margin call, and then are you at risk for anything not able to be gotten out of fast enough or is all that automated?

I know this is the variable portfolio topic, but I think it should be changed to the balls of steel speculation topic.

If I have this all wrong and there is little risk, then credit all the anecdotal stories I've heard of people getting wiped out in futures. Like those two old guys in Trading Places.
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Fri Aug 26, 2016 9:14 am

Cortopassi wrote:
Kbg wrote: My overnight margin is $6300 which is carrying a portfolio value of $49,400 (numbers rounded)
As one who doesn't understand futures, does this mean you are leveraged 7.8x?

So if/when Yellen comes and opens her mouth and gold, for example, dumps $100 instantly, what happens? Margin call, and then are you at risk for anything not able to be gotten out of fast enough or is all that automated?

I know this is the variable portfolio topic, but I think it should be changed to the balls of steel speculation topic.

If I have this all wrong and there is little risk, then credit all the anecdotal stories I've heard of people getting wiped out in futures. Like those two old guys in Trading Places.
Margin is really nothing more than an exchange/broker minimum nominal threshold for holding a futures contract(s). So without checking the numbers, if $6.3k in margin gives you control of a PP worth approximately $49.4k, then yes that would be correct. However Kbg is not advocating for adding contracts for each $6.3k in ones account.

You can essentially dial in the leverage to suit your needs.

For example, someone with $50k in investable assets, under Kbg's plan you could run use $6.3k in margin to buy those futures, and use the other $43k to place in T-bills. In that scenario you would only be leveraged 1x as a total portfolio.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Fri Aug 26, 2016 9:50 am

I understand futures in general but have no experience with them. I'd be interested in seeing a play by play for any paper trades you do to understand the mechanics involved
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