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 Nov 14, 2017 9:03 am

This is a must review. It totally drives home the point on how 3x daily reset ETFs perform.

https://seekingalpha.com/article/412435 ... oard?ifp=0

Viewing the 1 year column...

UPRO vs. SPY: Classic, low volatility, great trend = 3x+ performance (Frankly, this year has been exceptional in terms of trend and volatility and we shouldn't expect it to be like this very often.)

TMF and UGLD vs. their 1x ETFs...decay in action from not good to really not good.

However, if we do some simple math...it is very near to a wash at the overall portfolio level. Roughly gained 7% with UPRO and lost 7% with the combined TMF/UGLD due to +/- drift.

Hopefully 2017 will go down as another great year for this portfolio.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Nov 20, 2017 7:25 pm

It means absolutely nothing, but it's fun to post...my XIV is now up 609%. ::)
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sun Dec 10, 2017 9:05 am

I can’t remember if I posted this or not. It is worth a read .

http://ddnum.com/articles/leveragedETFs.php
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Mon Dec 11, 2017 5:02 pm

So I'm considering adding some XIV but then I realized I was actually confused and it's the opposite of what I was expecting.

My thought was that daily volatility hurts (decays) our 3x ETFs. Therefore we could hedge against decay by going long daily volatility. i.e. VIX

But XIV is inverse so... I'm starting to see that it reacts to volatility on a longer time scale. Therefore if the 3x ETFs go nowhere for a few months, we get a boost from XIV.

So could you elaborate a little more on how XIV helps you and why you chose 5%? I will be playing with your referenced backtester a bit before I jump in to make sure I understand how this works. I know I should read the prospectus, but sometimes it helps to have it in plain english first.
Kbg wrote:I can’t remember if I posted this or not. It is worth a read .

http://ddnum.com/articles/leveragedETFs.php
You did post that before and it was quite helpful. However, the author's point about 1x decay seems a bit misguided. Yes, if a 1x stock goes down 5% and up 5%, you have a 0.25% loss. However, if a 3x stock goes down 15% and up 15% you have a 2.25% loss. Here, the 3x funds experience 9x the decay vs. the 1x fund. No bueno.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Dec 11, 2017 7:53 pm

dc,

Yep, volatility hurts no doubt about it. It is unlikely we will get a pure 3x return over time due to volatility decay.

If you want to study up on XIV (or any of the other ETFs in this space), go here.

https://sixfigureinvesting.com/

I highly recommend folks read up and get comfortable or get not uncomfortable with anything before they invest and particularly VIX futures related products.

My basic take on XIV and it's allocation in a portfolio is that one should only put in the amount to which they could see it disappear and be able to deal with that occurrence. A more mellow version is ZIV. The basic reason for including XIV in the portfolio is it is the only asset, except for cash, in the portfolio that does well if nothing is moving and volatility is low. When this occurs the thing prints money (like this year). When this isn't the case the volatility is horrendous. The thing to remember, however, is that VIX will mean revert so one needs to have patience. In fact, a big loss in XIV is an excellent time to buy more of it and you will be rewarded with more than you lost assuming you have a cash reserve to take advantage of it. The reason for this is options can only go so high before they become prohibitively priced for hedging and at this point there will be mean reversion. On the flip side, one should be faithful in selling off gains by rebalancing when a band has been hit because a VIX spike/XIV plummet is a guaranteed event at least a couple of times a year.

As I've mentioned before, one can, aggressively, take a small dose from one's cash allocation or, conservatively, take a small does from one's equity allocation. In the latter case instead of 16.67 to a stock 3xETF it might be something like 11.67 to the stock ETF and 5% to XIV. In no case would I suggest anything north of 10%. Finally, remember XIV and TMF are negatively correlated so there is a tad bit of hedging built in.

Another repeat...it can be difficult to invest in anything that could go to zero. At anytime this is a distinct possibility for everything in this portfolio except for cash. However, the assets in the portfolio are negatively or uncorrelated to each other which is an almost magical property to have when combined with leverage and a cash reserve. (If the assets start getting correlated, it is time to bail out of this portfolio or switch to an unleveraged PP.) In the case of XIV the actual max loss since it has existed is over 70% and simulated historical loss is over 90%. This is balanced by the fact that the aftermath of each was several 100% returns afterward. With no cash to refill the tank investing in XIV is pure stupidity. With cash to refill the tank when this happens, its an awesome bet that one should take any time they can get it.

I've made a ton of money off XIV...hands down percentage wise my best investment since I first started using it in 2011. My first trade ever was that big plummet in 2011 and I promptly lost 60% of my original investment at its nadir. The story had a great ending though. I recommend the following for anyone investing in XIV.

1) Pair with a healthy cash allocation
2) Only allocate a small percentage of your total portfolio to it
3) Fearlessly rebalance into it
4) Diligently rebalance out of it

If you do the above, the odds are very good you will do well with it over time.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Dec 26, 2017 6:54 pm

Hi all,

I thought I would post to let folks know I'm seriously thinking of moving on from this portfolio. There are two reasons for this. The first is that for an aggressive portfolio I plain think I can do better from a risk/reward perspective. The second issue is I think we are taking a bit too much of a volatility haircut for my liking. (Note: I wrote item #2 before the analysis below and actually all things considered, item #2 just is and it isn't all that awful in my view.)

Using an annual rebalance and the 2x leverage version here is what we have year by year.

1x/3x/multiple of returns/multiple of draw down (with annual rebalancing)

2012 6.2/7.9/1.27/2.33
2013 -2.4/0.9/.38/1.66
2014 9.6/19.6/2.04/2.17
2015 -2.7/-8.4/3.11/2.23
2016 5.5/7.4/1.34/2.30
2017 10.0/19.2/1.99/2.15 (as of 12/22/17)

So it looks like our leverage factor is 1.68x on average on the overall returns and as measured by max draw down an average of 2.14x. If one looks at the return profile what we find is that in good years (2014,2017) for the PP we get pretty close to 2x leverage, with a sample size of one we get 3x to the downside and in OKish years the volatility drag is a fairly significant hit to performance (2012, 2016...and 2013 but it kinda worked out OK for that year).

If someone(s) have taken the plunge with real money then I guess you will have a decision to make and I hope you haven't jumped into anything that wasn't well thought out. For educational purposes only, (please see a financial adviser who can assist you with your specific circumstances) if you are trying to decide whether or not to continue, I think you should have all the tools necessary to make the right decision for you. The annual returns thus far and my explanation above I assess are a reasonable expectation of what one could expect going forward.

Starting from 1/1/2012 to 12/22/17 I'm showing a CAGR of 4.19/-8.06 MaxDD for the 1x ETF version and 7.37/-18.58 for the 3x ETF 2x leverage version. That's a leverage factor of 1.76.

Total returns come in at 27.80% vs. 52.93% which is a leverage factor of 1.9.

Comparing max dds the leverage factor is 2.3.

When one looks at the bottom line of total return, that's pretty close to 2x and really not too bad given the challenges with using 3x ETFs. If we could somehow gain back the delta in costs between 1x and 3xETFs, things would probably look even better. Or said another way, around .7-.9% CAGR delta can be explained by relative ETF cost differences.

The next question to consider is: Are there ways to mitigate volatility decay? The short answer is yes. The easiest way would be to simply use margin in a taxable account. However, even with Interactive Brokers it is probably better to just stick with leveraged ETFs. The best way, though considerably more complex and requiring a large account, would be to use futures with ETFs to fine tune allocation/position sizing.

So what's next for me? Currently, I'm looking at a mix of TMF, XIV and gold futures with a larger cash balance. The odds are pretty good I'll go that route and I'll make a decision before the end of the year. If I do go that route, let me know and I can open another thread for those who would like to follow. And as a final note, if I do go that route I'll post 2017 results and end it there. If anyone(s) continue on with this port, I hope they will keep the thread going. Overall, I think for those who really like the PP, want something a bit more aggressive and don't mind all the pluses and minuses discussed over the past couple of years this port is not a bad option.

Just remember...eyes on the overall port not the individual positions and keep a big cash cushion!
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Thu Dec 28, 2017 2:30 pm

Do those results include your personal port which includes 5% XIV? Does this not mitigate some of the issues you described such as lowering portfolio level volatility?
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Re: 20% annual returns over 40 years...interested?

Post by modeljc » Thu Dec 28, 2017 5:55 pm

I looking at returns form April 16, 2009 using WONK 15% SPXL, 15% TMF, 45% physical gold or GLD, and 25% SHY. Looks like CARP of 19%. You may be moving on! But I don't get the reasoning! Most of us would die to get these returns.

quote="Kbg"]Hi all,

I thought I would post to let folks know I'm seriously thinking of moving on from this portfolio. There are two reasons for this. The first is that for an aggressive portfolio I plain think I can do better from a risk/reward perspective. The second issue is I think we are taking a bit too much of a volatility haircut for my liking. (Note: I wrote item #2 before the analysis below and actually all things considered, item #2 just is and it isn't all that awful in my view.)

Using an annual rebalance and the 2x leverage version here is what we have year by year.

1x/3x/multiple of returns/multiple of draw down (with annual rebalancing)

2012 6.2/7.9/1.27/2.33
2013 -2.4/0.9/.38/1.66
2014 9.6/19.6/2.04/2.17
2015 -2.7/-8.4/3.11/2.23
2016 5.5/7.4/1.34/2.30
2017 10.0/19.2/1.99/2.15 (as of 12/22/17)

So it looks like our leverage factor is 1.68x on average on the overall returns and as measured by max draw down an average of 2.14x. If one looks at the return profile what we find is that in good years (2014,2017) for the PP we get pretty close to 2x leverage, with a sample size of one we get 3x to the downside and in OKish years the volatility drag is a fairly significant hit to performance (2012, 2016...and 2013 but it kinda worked out OK for that year).

If someone(s) have taken the plunge with real money then I guess you will have a decision to make and I hope you haven't jumped into anything that wasn't well thought out. For educational purposes only, (please see a financial adviser who can assist you with your specific circumstances) if you are trying to decide whether or not to continue, I think you should have all the tools necessary to make the right decision for you. The annual returns thus far and my explanation above I assess are a reasonable expectation of what one could expect going forward.

Starting from 1/1/2012 to 12/22/17 I'm showing a CAGR of 4.19/-8.06 MaxDD for the 1x ETF version and 7.37/-18.58 for the 3x ETF 2x leverage version. That's a leverage factor of 1.76.

Total returns come in at 27.80% vs. 52.93% which is a leverage factor of 1.9.

Comparing max dds the leverage factor is 2.3.

When one looks at the bottom line of total return, that's pretty close to 2x and really not too bad given the challenges with using 3x ETFs. If we could somehow gain back the delta in costs between 1x and 3xETFs, things would probably look even better. Or said another way, around .7-.9% CAGR delta can be explained by relative ETF cost differences.

The next question to consider is: Are there ways to mitigate volatility decay? The short answer is yes. The easiest way would be to simply use margin in a taxable account. However, even with Interactive Brokers it is probably better to just stick with leveraged ETFs. The best way, though considerably more complex and requiring a large account, would be to use futures with ETFs to fine tune allocation/position sizing.

So what's next for me? Currently, I'm looking at a mix of TMF, XIV and gold futures with a larger cash balance. The odds are pretty good I'll go that route and I'll make a decision before the end of the year. If I do go that route, let me know and I can open another thread for those who would like to follow. And as a final note, if I do go that route I'll post 2017 results and end it there. If anyone(s) continue on with this port, I hope they will keep the thread going. Overall, I think for those who really like the PP, want something a bit more aggressive and don't mind all the pluses and minuses discussed over the past couple of years this port is not a bad option.

Just remember...eyes on the overall port not the individual positions and keep a big cash cushion![/quote]
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Dec 28, 2017 7:17 pm

The returns posted previously are 25% ea to SHY, SPY, TLT, GLD and/or 16.67% UPRO/TMF, 16.66% UGLD and 50% SHY and do not include XIV.

My returns net of all costs as of yesterday vs. 100% SPY (per my broker)

2014 - 14.03/13.47
2015 - -9.99/1.25
2016 - 26.43/12.00
2017 - 22.24/21.91

So I get a 4 year CAGR of 12.22 to 11.91 and terminal wealth $15861.27 vs. $15686.77 per 10K

In a backtest (no trading costs) using the 45/16.67/16.66/5% XIV mix I get 12.03 CAGR/18.20 MDD vs. SPY's 12.23/13.02. So in live and fake trading this portfolio has kept pace with a 100% stock portfolio however with more draw down at their respective worsts. I think overall this is pretty good. However, we can't do a bunch of high 5's yet. We need to see how this thing does in a bear market. If history is any guide this portfolio should pull away quite nicely during the next bear.

As concluded with in my last post, I still think this is a pretty good portfolio. In fact, I'm going to continue running a very close variation of it in one of our IRA accounts. So here's the plan going forward:

I will make my last post here to report out 2017 results this weekend.

I'm going to open a new thread entitled something like Leveraged Permanent Portfolios.

I will post on the two variants I'm going to do vs. the standard unleveraged ETF PP.

Variant 1 will be 45/16/16/16/7

Variant 2 will be 60% TLT, 20% XIV, ~ 33% gold futures with ~10% each in VCSH and straight cash. Yes, that does add up to more than 100%. The TLT/XIV portions will be pretty static whilst the gold futures and cash/ST bond elements will bounce around a bit as a percentage of the portfolio. I think it will be interesting to see what happens with the two in the next bear market. I'm fully expecting XIV to get absolutely crushed/destroyed/obliterated. If I've done my homework well, that should be okay.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Sat Dec 30, 2017 9:09 am

Thanks again kbg! This portfolio has been good to me especially this year, but I have been feeling the same things you have from risk/reward perspective. Beyond risk, just the ulcer factor IMO is high since there is the potential for an urgent rebalance while I’m on vacation or angsting about decay (real or imagined)

I’ve been wanting to switch to a GB for a while but didn’t want to buy more equities at the top. Obviously that was a fools errand. If I do switch, at this point I’ll need the cash from this experiment to buy the SCV.

I also used leverage in the past on the PP, which didn’t work amazingly for me based on the specific returns but I had not complaint with the actual strategy using IB (then) extremely low and tax deductible rates. I generally tried to size my margin balance such that margin interest was equal to bond interest in the account and no more than I could reliably expect to save over the next year.

Please post a link to the new thread when it’s up!
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Dec 30, 2017 11:47 am

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 12/30/16 through the close on 12/29/17

2.5x = 31.63%/-6.85%DD

2x = 21.14%/-4.85%DD

1.5x = 10.62%/-2.63%DD

1x = 11.02%/-2.24%DD

Personal mix = 22.98%/-5.42% DD

SPY TR: 21.17%/-2.61% DD

Torture Port (SHY/XIV/TMF, 50/25/25) 50.65%/-8.69%DD

Comments: This will be my final post on this thread unless someone picks it up and I decide to comment on something. I will put one very strong opinion out there. I think the 1.5x portfolio is freaking amazing for a conservative investor. Literally every other asset other than cash could get obliterated and the loss is a maximum of 25%. Save a true SHTF scenario that isn't going to happen and that my friends is categorically a better proposition than the actual HBPP. Of course an HBPP is more grounded in tangible things, but if you can get by that I think this one is a winner. No doubt you are going to take a bit of a haircut every year because of volatility, but one has to balance that with the safety aspect of things. I mean good heavens, you could be 75% in cash, CDs, I-Bonds, STTs, TIPS, whatever. (Don't be stupid and go into cash...you'll get killed by inflation. At least do a STT ladder or CD ladder. These two won't grow your money, but they will pace with inflation. Personally, I'd look at parking as much as I could into I-Bonds...cash flow needs depending.)

As posted a bit earlier I'm going to open up a new thread and post updates on my new mixes and the 1x version there. I guess I could stay here, but I think I would be polluting the original intent of this thread. I'll probably notch up the discussion complexity a little bit by talking about the pros and cons of futures and options in the new thread. Accordingly, there will be some learning opportunities there similar to how I covered leverage and volatility issues here. For those who have put some really money into this stuff, I think we've done OK. And if you started 1/1/16, then you have been very lucky indeed. Additionally, this year was freakishly good...we've been very spoiled. It is the first year ever in the US stock market where there wasn't a single down month (bizarro really).Times are not always this good. If you recall, my second year in this portfolio was a nice 10% loss...which was sorely trying. However, personal homework makes for confidence which was subsequently rewarded. (Foot stomp: The last sentence was a piece of investing advice that will make you a successful investor.) Personally, I think the prospects for this port are good going forward and I will still have money in a very close version of it. Best wishes for a prosperous new year!

Updated: New Thread found here viewtopic.php?f=10&t=9310

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

Post by Wonk » Mon Jun 24, 2019 8:20 pm

It's been a while but I figured I would check back into this forum and resurrect this thread.

I'm still running the leveraged PP (3x) and it's been a helluva ride. But I'm about to exit stage left within the next week or two, moving back to a 1xPP with a healthy chunk of cash. The last month has been outstanding with nearly 20% returns and the reality is it just won't last. One of the things that's nice about the 3xPP is you get to see all of the ebbs and flows charted out in a somewhat predictable pattern. It's easy to see when the 3xPP is under or outperforming because the leverage accentuates the cycles. Most of the up and down cycles last about 8-12 months. We're currently riding to the end of an up cycle and for me it's time to pull the leverage off, get to safety and expect some drawdown in the year ahead.

I was full "ride or die" through 2018 and while it was a good exercise for expanding my volatility tolerance, I plan to be more active in managing leverage in the months and years ahead. The one thing I'm not too sure about is levering up during a 2008-style moment. I'm not entirely sure the system will stay in tact. So we'll see. But I will say that I've been in the trenches with this portfolio and for the most part it has performed as expected.
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