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 » Wed Sep 13, 2017 10:59 am

Mandatory reading if you have $$$ in this stuff. Comes out monthly.

https://seekingalpha.com/article/410607 ... -dashboard
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Oct 02, 2017 10:00 pm

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 10/2/17

2.5x = 18.36%/-6.85%DD (Quarterly rebalance...19.74/-6.64%DD)

2x = 12.48%/-4.85%DD (Quarterly rebalance...13.21/-4.73%DD)

1.5x = 6.60%/-2.63%DD (Quarterly rebalance...6.88/-2.65%DD)

1x = 7.01%/-2.24%DD

Personal mix = 16.32%/-5.42% DD

SPY TR: 13.62%/-2.61% DD

Torture Port (SHY/XIV/TMF, 50/25/25) 25.50%/-8.69%DD (Quarterly rebalance...25.03/-6.14%DD)

Comments: XIV and TNA puts me back in the outperform mode for the personal port...and the torture port continues to torture with its amazing returns. We've taken a pretty good volatility haircut this year...but we got just as we could/should expect. Worst drag is with UGLD where we've lost about 5% points, TMF +2% points, SPXL is pretty much dead on 3x leverage. Volatility drag is definitely the bummer side of this technique/3xETFs. However, as we are seeing there is nothing unexpected in the time I've been posting these updates. Vol hurts or helps solely based on whether we get a trend or not. Too bad we can't see the future. Rebalancing GLD (UGLD) at the 115 and 123 price levels (using GLD prices) would have given us a nice performance boost...all in hindsight. Unless things get interesting, will probably not do an update until the end of the year. At that point I'll ask to see a show of hands for continuing these posts. If I get 10+ I'll continue. If less, Dec 2017 will be it. As CraigR mentioned, after a while there just isn't much to say.
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Re: 20% annual returns over 40 years...interested?

Post by mukramesh » Wed Oct 04, 2017 12:29 pm

Please continue Kbg! I actually do follow this thread and am very interested in how your personal portfolio (with XIV) performs vs. the straight 2x leveraged PP.

Thank you again for your posts in this thread and on this forum. I've learned a lot by reading them.
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Re: 20% annual returns over 40 years...interested?

Post by bedraggled » Wed Oct 04, 2017 4:36 pm

Please continue.

Your posts are a learning experience.

If you cease teaching this, I am adrift.

Thanks for all the work.
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Re: 20% annual returns over 40 years...interested?

Post by ILoveMoney » Wed Oct 04, 2017 9:23 pm

I also enjoy your posts Kbg! Please keep us posted. :)
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Re: 20% annual returns over 40 years...interested?

Post by Wonk » Wed Oct 18, 2017 9:37 am

Kbg wrote: Unless things get interesting, will probably not do an update until the end of the year. At that point I'll ask to see a show of hands for continuing these posts. If I get 10+ I'll continue. If less, Dec 2017 will be it. As CraigR mentioned, after a while there just isn't much to say.
First time back in a while for me--mainly because things have been operating as expected. Kbg your posts are always interesting and insightful. Please continue. I've been running real money in 3x for a while after a ton of research into this approach. I have no reservations about performance of the 3xPP. As mentioned it's operated perfectly for 12ish years. The main thing I think everyone needs to be aware of is counterparty risk. In a massive liquidity event there's a not insignificant chance of insolvency from a counterparty. No one knows what happens at that point so caveat emptor.

I think a way to mitigate risk is to hold 3x gold in physical & treasuries directly with the rest in 3x funds. So an example would be 15 SPXL/15 TMF /45 Physical Gold/25 STT @TD. Leverage is reduced below 2 but only 30% of this portfolio is subjected to counterparty risk. Real returns in this model have come in at 1.85x an unleveraged PP long term with predictable SD & MaxDD (about 10bps more than comparative unleveraged).

One thing I've come to appreciate is you need to be able to stomach volatility and have a real idea of when you're going to start sweating. If you can train yourself to handle large swings then you can start looking at juicing returns in various ways(3x, cashless, slice/dice equities). I've had a sizeable position in gold miners for 10 years so after 80% interim drawdowns the 3x funds volatility barely make me bat an eye anymore. But I'm still aware of the counterparty risk issue in 3x.

Looking ahead after the next market crisis once equity valuations readjust, I like the idea of migrating into a 3x golden butterfly approach (holding bullion and treasuries directly) along with income producing real estate as another diversifier. This assumes 3x funds are still around. Running something like this:

10% SPXL
10% TNA
10% TMF
30% Physical bullion
20% STT
20% Real Estate (high CAP rate property, directly held, no REIT)

Expected real returns are excellent, risk is mitigated and liquidity is high. Pair this approach with a successful small business and/or private equity and I doubt you can get risk adjusted returns much higher than that. Think of it as a modern day high speed Jakob Fugger approach with a hat tip to Harry Browne.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Oct 18, 2017 4:00 pm

On counterparty risk a small step is to use UPRO instead of SPXL which has the side benefits of being a cheaper ETF and marginally better performance as a result. Not as good would be to replace UGLD with DGP but which puts the port with three different providers.

Also, I don’t have serious concerns with swaps or futures on the three asset classes involved because of the assets themselves (ginormous scale) and the nature of the instruments themselves. More esoteric stuff may be in the mix but would be harder to obtain much scale vs. swaps/futures. This all presumes standard market risks even severe ones vs. comets, nukes, zombies.

If I had the resources I’d implement the entire thing with futures and cash.
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Re: 20% annual returns over 40 years...interested?

Post by modeljc » Wed Oct 18, 2017 5:10 pm

I still playing on Paper. Hope both KBG & Wonk will keep posting. Even if it is Annual or Quarterly.
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Re: 20% annual returns over 40 years...interested?

Post by modeljc » Wed Oct 18, 2017 5:33 pm

Wonk,

Like thinking forward also about a Golden Butterfly approach. If you want 20% invested in Real Estate and you want to be passive can you suggest a High cap approach not helded directly?
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Wed Oct 18, 2017 5:46 pm

I pulled my small VP after several months and realizing I couldn’t stomach the periods when the returns were like 2x HBPP and volatility was like 3x. I thought I could handle it but I couldn’t. No harm no foul, one less spreadsheet to track.

Huge respect to Kbg for breaking it all down so clearly and frankly. My eyes were opened to thinking I haven’t seen elsewhere. The idea of leveraging the old HB explanation of how the winners outrun the losers most of the time will stick with me.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Oct 18, 2017 6:26 pm

Shawn,

It’s good to bail as soon as you know it isn’t for you and you appear to have done so before a major drawdown, sincerely, good call I think. It’s not like I’m unaffected by the vol, but I learned early to keep my eyes at the porfoilio level. The components individually will drive you nuts.

This post also gives me the opportunity to reiterate...no one should mistake this for a simple juiced up PP. It’s definitely a different beast on a host of levels and more risky than the three non-cash components in their pure form.
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Wed Oct 18, 2017 7:25 pm

It was an interesting time to test (aren’t they all?). I bought into a nice 10.8% drawdown July 14 2016 to December 31 to learn the value of the big cash buffer. December 31 to June 1 2016 went up enough to almost make it back before calling it.
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Re: 20% annual returns over 40 years...interested?

Post by Wonk » Thu Oct 19, 2017 11:11 pm

Kbg wrote:On counterparty risk a small step is to use UPRO instead of SPXL which has the side benefits of being a cheaper ETF and marginally better performance as a result. Not as good would be to replace UGLD with DGP but which puts the port with three different providers.
That's true and worth pursuing on at least some level for further diversification. Although I would anticipate any event that would take down a singular player would cascade into nearly all of them. If the derivatives market implodes on a large scale I'm not sure anyone with exposure gets out unscathed.
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Re: 20% annual returns over 40 years...interested?

Post by Wonk » Thu Oct 19, 2017 11:29 pm

modeljc wrote:Wonk,

Like thinking forward also about a Golden Butterfly approach. If you want 20% invested in Real Estate and you want to be passive can you suggest a High cap approach not helded directly?
Unfortunately there's no free lunch. To be truly passive you'd need to turn to securities. Once REITs get involved, there's little value left for the guy/gal at the end of the line. There are plenty of stories from local investors in many different cities who have seen REITs gobble up assets at absurd valuations that no one else would touch. You'd probably want to look into the same sectors where the numbers are still favorable(10+ CAP rate) : midwest US, multi-family, C areas, etc. Maybe look at emerging markets. I honestly think on a risk adjusted basis the average investor who's willing to put in just a little bit of management oversight will outperform many of the best REITs. Personally I'm exploring mobile home parks since I like the idea of extremely affordable housing over the next 20 years. I think it will be in high demand.

@Mr Vacuum:
Good thing you got out when you did. I remember the intra-year Max drawdown for the 1xPP at about 20% in either 2007 or 2008. That puts a 3xPP in the 60-65% loss range in the span of a few months. It came back by the end of the year but not a lot of people are going to be willing to ride that one out.
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Re: 20% annual returns over 40 years...interested?

Post by modeljc » Wed Oct 25, 2017 4:03 pm

Wonk,

I got just one more question. Since you are buying the 45% Physical gold what re-balance band are you using. And what band do you use for the Spxl and the TMF?

Thanks! I like your post on reducing risk!!
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Oct 25, 2017 4:46 pm

I won't call it a law of finance, but it's a decent rule of thumb. It is extremely difficult to find something that doesn't give you a 2:1 (or worse) MaxDD to CAGR over an extended period of time. Folks should cage their expectations and risk to reward ratios accordingly. If a 10-20% drawdown is going to freak you out, honestly, stick to medium term bonds and cash.

Also, if you are in the phase of life where you are making DISCIPLINED periodic investments you WANT the occasional huge draw down. Once you get somewhere in your mid 50s, then, not so much.

To be successful in financial markets, you just have to embrace the suck and manage it intelligently...because very few individuals can avoid the suck and those who spend most of their time trying to avoid the suck strongly tend to have screwed themselves over an investing lifetime.

Embracing the suck is what puts dollars in your pocket. There truly is no free lunch in this area of endeavor.
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Re: 20% annual returns over 40 years...interested?

Post by Wonk » Wed Nov 08, 2017 10:40 am

modeljc wrote:Wonk,

I got just one more question. Since you are buying the 45% Physical gold what re-balance band are you using. And what band do you use for the Spxl and the TMF?

Thanks! I like your post on reducing risk!!
I've been rebalancing at years end through new cash contributions rather than hitting the bands. It may or may not be the best strategy (KBG would know) but it's easy so that's how I've run it. However, if I there was a strong move I'd rebalance when 3x hits a 5% band in either direction (10% or 20%) as well as a 15% band on the gold (30% or 60%).
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Re: 20% annual returns over 40 years...interested?

Post by Wonk » Wed Nov 08, 2017 11:32 am

Kbg wrote: To be successful in financial markets, you just have to embrace the suck and manage it intelligently...because very few individuals can avoid the suck and those who spend most of their time trying to avoid the suck strongly tend to have screwed themselves over an investing lifetime.
Truth! One of the most important things people can do in my opinion is flex & condition their mental "risk muscle." An average person saving an average amount each year and investing in a low-variance portfolio is just not going to give them the payoff they likely want in retirement. If they just condition themselves to live with 30-50% max drawdowns during their earning years, they can realize the advantage of higher expected yields compounded over time. They can always scale back risk & variance in retirement for peace of mind with SWRs. My sister loves the idea of paying down her 2.75% mortgage for security. I think that's crazy when you can earn 400bps more on the spread by arbitraging that capital with an unleveraged PP or GB portfolio.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Nov 08, 2017 11:40 am

(KBG would know)
My philosophy on rebalancing, influenced by some papers on it, is that it's mostly useful for risk control/setting an expected risk profile. Whether it's performance enhancing after costs is pretty debatable.

My strongest advice is just find something you like and implement it faithfully. I know some folks have dug into this topic quite deeply on the board and if one can find those threads, it may be a useful exercise to find something you like/believe in. My commentary on the studies is that, like any backtest, the results are path dependent and this has a significant impact on what will be the best technique going forward. (Fact is we don't know.)

Using 3x ETFs and the philosophy noted, I'd tend to error on the side of more rebalancing vs. letting a 3x position get very large/out of parameters...it can go just as quickly the other direction. Remember, one of my working assumptions is that any one of the positions could go down 90%+.
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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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