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

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

iwealth
Executive Member
Executive Member
Posts: 409
Joined: Thu Apr 26, 2012 5:45 pm

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

Post by iwealth » Fri Aug 26, 2016 9:56 am

Kbg wrote:and tax treatment is vastly superior in a taxable account
This wouldn't necessarily be true if you only rebalance yearly which I believe you've advocated if running a VP with the 3x ETFs...right?
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Fri Aug 26, 2016 10:12 am

MGC is the micro gold contract and = to 10 oz, so right now $13K and change per contract. Let's say gold dumps a $100 instantaneously then with this contract you would need at least 1000 in cash and if it is in your account exactly nothing happens. Futures are marked to market daily which means if you have a losing day your brokerage takes out whatever you lost from your account in cash at the end of the day. If you have a winning day the opposite occurs. Additionally, overnight margin/contract margin is set for extreme moves and how it is established is using world class risk analysis algorithms. So at $6300 per 49K that means you are geared for almost a 13% negative intraday move.

If you step back and think about it there is nothing different going on with your account. If you are holding equivalent GLD, real gold or MGC and gold dumps $100 then you are down $1000 period. The only difference with a futures contract is $1000 is going to be taken away at the end of the day from your cash balance...but your EOD overall account balance will be exactly the same.
From a pure monetary stand point there is exactly zero difference between 10oz of gold in a futures contract, an ETF or real gold. Obviously the three have different instrument characteristics.

Futures get a bad wrap due to stupidity but assuming the cash value of the contract is fully backed with that amount of cash they are no more or less dangerous than the physical or ETF version. We can have a debate about the merits of physical vs. a future and one would get no real argument from me on the physical. With regard to the ETF versions I'd argue futures are at least as safe and probably more safe. With regard to cost, there is simply no comparison. The future will be much cheaper,to hold.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Fri Aug 26, 2016 10:28 am

iwealth wrote:
Kbg wrote:and tax treatment is vastly superior in a taxable account
This wouldn't necessarily be true if you only rebalance yearly which I believe you've advocated if running a VP with the 3x ETFs...right?
Correct for stock and LTTs...physical gold is different of course and someone would need to dig into that one.

In a taxable account ST and LT gains are taxed according to holding length. Futures are always 40ST/60LT regardless of hold length. Hands down futures are my favorite asset class at tax time. You get a form from your broker, it has a gain or loss amount on one line, the 40/60 split on two other lines and that's it. All that hold length and wash sell tracking crap you have to do and report trade by trade is completely N/A. Tax loss harvesting also can't be done as there is no reason for it. The down side, and it is a significant one, is that like your daily brokerage account mark to market, on the 31st of December each year the chalk line will be snapped and if you are up for the year you are going to get taxed, if you are down the loss will be realized as well.

Good question...forced out a good issue to consider.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Tue Sep 06, 2016 2:16 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 8/31/16

2.5x = 36.70%/-5.79%DD

2x = 24.80%/-4.36%DD

1.5x = 12.94%/-2.59%DD

1x = 12.28%/-1.63%DD

Personal mix = 34.82%

Comment: August was a modestly down month. For my personal port there was an XIV rebalance and I'm now above my tracking bogey by 7.7% this year. Unless something goes crazy in the last hour of today's market, today will mark another new yearly high in the portfolio. Such a nice change from 2015 which pretty much sucked.

In watching my paper trading futures version of this, I think a good rule would be to roll the futures a month before expiration. There was an automatic force out of a position in UB due to not meeting IB's check on my ability to deliver actual LT treasuries and the MGC future and how it trades is still a bit of a mystery to me. Definitely more work to do in the futures version of this. Even if one is experienced in futures I recommend paper trading in your brokerage's paper trading account first to get a feel for the daily changes and mechanics of it.

Finally, while I'm trading a variation of the 2x version my favorite is still the 1.5x version. I predict here and now it is going to outperform the standard PP when/if interest rates begin to rise assuming one is in STTs for cash. It will receive the benefit of 3x the cash over a traditional PP.
clacy
Executive Member
Executive Member
Posts: 1128
Joined: Mon Mar 14, 2011 8:16 pm

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

Post by clacy » Tue Sep 06, 2016 4:28 pm

I may have misunderstood you, but shouldn't a 1.5x portfolio be 12.5% each SPXL/TMF/UGLD (with 62.5% SHY)?

That portfolio is up 19.9% YTD.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Tue Sep 06, 2016 5:07 pm

This question came up at the end of last year which is why I explicitly post the math of the leverage computations. You can leverage the non cash component (what you did) or look at the total notional portfolio value from the base point of 100K as the leverage (how I'm tracking).

Using your numbers my method, the port is a 1.75x as the total notional value is 175K. In your method the active component is levered up to 1.5x as you note. Regardless, everyone should understand the results/risk are going to be driven by the amount of leverage employed to the active risk components.

There probably is a "correct" method for this and I may not be using it, but so long as everyone can see the math with transparency that is what matters most. In any event, your broker is going to report performance stats based on the starting value of the portfolio and not whatever we consider our portfolio to be leveraged to. All of the numbers I post are based on a 100K starting point. So assuming my starting point this year was 100K my personal port is now valued at $134820 for example. Percent performance would be 69.6% if I was only counting the risk assets...which doesn't make intuitive sense to me at a portfolio level.

Either way works, but for the reason noted in the last two sentences of the above para, I'm going to stick with the current method.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Fri Sep 30, 2016 10:45 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 9/30/16

2.5x = 35.56%/-9.56%DD

2x = 23.95%/-7.14%DD

1.5x = 12.58%/-4.12%DD

1x = 12.09%/-2.67%DD

Personal mix = 33.21%

Comment: ~ Doubled this year's MaxDD during September; but a nice comeback at EOM so just slightly below this year's high.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Wed Nov 02, 2016 9:40 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 10/31/16

2.5x = 24.71%/-15.10%DD

2x = 16.84%/-11.25%DD

1.5x = 9.01%/-6.45%DD

1x = 9.45%/-4.35%DD

Personal mix = 25.88%

Comment: In draw down mode with max dd's about doubling across the board. Note the compounding of the dd with all the leveraged versions under performing their leverage values.
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

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

Post by MachineGhost » Wed Nov 02, 2016 9:53 pm

Kbg wrote:Comment: In draw down mode with max dd's about doubling across the board. Note the compounding of the dd with all the leveraged versions under performing their leverage values.
So the delta is decreasing when prices go the wrong way? That would be pretty darn cool, if true.

So basically, so far, the leverage factor for the MaxDD is about 3.47x between 1 and 2.5 as a rule of thumb. So that would roughly imply a -62.46% to -86.75% MaxDD during the 1981 shock at the 2.5 level. Scary. Then again at 25%+ CAGR, getting back to breakeven probably won't take any longer than it did for the 1.

What might be more interesting with this leverage is using trend following to tighten up the risk while keeping the CAGR ridiculously elevated. That would be a lot easier to home brew than the intense way AAA does things.
Last edited by MachineGhost on Wed Nov 02, 2016 10:08 pm, edited 1 time in total.
"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!
User avatar
Kbg
Executive Member
Executive Member
Posts: 1695
Joined: Fri May 23, 2014 4:18 pm

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

Post by Kbg » Wed Nov 02, 2016 10:05 pm

What you point out is one of the non-intuitive aspects of this...you actually lose less proportionately in a DD. But it is still 3xish so it sucks.
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

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

Post by MachineGhost » Wed Nov 02, 2016 10:12 pm

Kbg wrote:What you point out is one of the non-intuitive aspects of this...you actually lose less proportionately in a DD. But it is still 3xish so it sucks.
Maybe, but if you have confidence that the other side of the equation will make up for whatever MaxDD reaches, then there's no real problem (other than the PP breaking apart).

However, I do think using leverage without specifically risk normalizing the no-cash assets is just going to amplify the weighting errors between the assets. In 1 we can live with it because its so marginal and not worth the negatives to fix, but at 2.5? AFAIK, volatility does not scale linearly.
"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!
User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

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

Post by MachineGhost » Wed Nov 02, 2016 10:18 pm

P.S. The idea of a Taleb portfolio with a leveraged PP sounds rather attractive after the last two years. Put 90% into I-Bonds and the remaining 10% into the most leveraged PP possible. I could really sleep at night with that compared to the stress of getting fully invested in 1x. Cash is almost magical. Cash is freedom to chose!
"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!
Post Reply