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

Post by Kbg » Thu Nov 03, 2016 8:51 am

I think something like XIV is vey good for a Taleb like strategy. XIV is basically another 3x ETF is a bull mkt but it excels in flat/chop.
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Re: 20% annual returns over 40 years...interested?

Post by MachineGhost » Thu Nov 03, 2016 11:04 am

Kbg wrote:I think something like XIV is vey good for a Taleb like strategy. XIV is basically another 3x ETF is a bull mkt but it excels in flat/chop.
I have been pondering about backtesting volatility in the PP lately to see how it goes for downside protection. But the problem with the VIX ETFs is they don't act as expected because they're using futures contracts on the VIX not tracking the spot VIX per se. So I think these futures contracts based VIX ETFs are far better for arbitraging the uniquely resulting VIX smile than getting spot VIX exposure. Fortunately, there's now a ETF that tracks the spot VIX that just came out last year (its in my pile of paperwork somewhere).
"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!
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Re: 20% annual returns over 40 years...interested?

Post by TrickPony » Thu Nov 03, 2016 2:07 pm

Hello,
Is there anyway that you could post the results of this leveraged portfolio using 11.111 x 3 and SHY= 66.67?
I can remember in your old posts it was listed "just for the fun of it"
Thanks or any info
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Thu Nov 03, 2016 2:37 pm

11.1% each in SPXL, TMF and UGLD and the rest in SHY (rebalanced quarterly) is +12.4% YTD or 14.9% CAGR. Max DD -5.96% YTD
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Nov 03, 2016 6:52 pm

No rebalance YTD is 11.89/-8.18 and I get just a wee bit less on the quarterly 12.2/-5.83.

I would recommend this version to anybody, including grandma. Of note, when I was backtesting (simulated) this during the 70's (high inflation) the big cash portion was a very nice boost over the traditional PP.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Nov 03, 2016 6:58 pm

MachineGhost wrote:I have been pondering about backtesting volatility in the PP lately to see how it goes for downside protection. But the problem with the VIX ETFs is they don't act as expected because they're using futures contracts on the VIX not tracking the spot VIX per se. So I think these futures contracts based VIX ETFs are far better for arbitraging the uniquely resulting VIX smile than getting spot VIX exposure. Fortunately, there's now a ETF that tracks the spot VIX that just came out last year (its in my pile of paperwork somewhere).
I have a 5% long allocation to XIV and treat it as equity for portfolio purposes. Trading VIX ETF phenomenon is pretty well known now. There are trade offs and people get very cosmic with it, but the bottom line is you are selling (or buying) stock market insurance and sound insurance business practices should be applied (sell when everyone wants it, have a big reserve). Anything more is messing at the margins.
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Fri Nov 04, 2016 11:08 am

36 month performance re-balanced quarterly:

1X PP

+14.8%
4.7% CAGR
0.76 Sharpe ratio
-6.85% Max DD

3X PP

+34.0%
10.2% CAGR
0.63 Sharpe ratio
-22.46% Max DD

Clearly this wasn't an ideal time for the PP with gold dragging the portfolio down, however it also wasn't a particularly bad time period either. Less than a 7% DD for the 1x version.
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Re: 20% annual returns over 40 years...interested?

Post by TrickPony » Mon Nov 14, 2016 12:05 pm

Damn, did I pick a bad month to start this leveraged portfolio? (66% cash)
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Mon Nov 14, 2016 2:45 pm

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

Post by Cortopassi » Mon Nov 14, 2016 3:16 pm

We have all gotten hit this month.

I "know" you're supposed to feel the same theoretically, as a non levered PP, since your overall money at risk is the same as one, but I would bet good money it "feels" worse!
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Nov 14, 2016 10:40 pm

It will be fine...my initial foray was a year long drawdown from pretty much day 1 with well over 50% losses in UGLD.

You have a big wad of cash and as I've mentioned several times, it is a near certainty that you will experience one asset going to zero over the course of a year.

This is an aggressive growth portfolio and will have ups and downs.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Wed Nov 16, 2016 12:04 pm

Kbg wrote:It will be fine...my initial foray was a year long drawdown from pretty much day 1 with well over 50% losses in UGLD.

You have a big wad of cash and as I've mentioned several times, it is a near certainty that you will experience one asset going to zero over the course of a year.

This is an aggressive growth portfolio and will have ups and downs.
So far I have ups and downs but no rebalance bands yet. Was getting really close on equities but it reversed.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Wed Nov 16, 2016 2:26 pm

I debated rebalancing last night but I'm going to hold for a bit. We are in the sweet spot of the investments year right now for equity.

With regard to going to zero the reverse occurs as well. I have some lots up 150%ish with a hold measured in months. Just keep an eye on the account balance not the position balances. Day to day big picture the ride is pretty mellow I think considering what is under the hood.
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Re: 20% annual returns over 40 years...interested?

Post by jay » Sat Nov 26, 2016 6:23 pm

this is a very interesting thread, but too long to read every post so I apologize if this question is already addressed.

What is a good rebalancing strategy for different flavours of this leveraged combo of Cash/TMF/SPXL/UGLD? like

75/8.33/8.33/8.33
50/16.67/16.67/16.67
25/25/25/25
0/33.33/33.33/33

With 3X ETFs I suppose one cannot wait too long before rebalancing due to time decay. It seems to me that bands and/or quarterly might be a good option. But what bands should one use? A good band for 50/16.67/16.67/16.67 might be 7.5% but not sure.

One can also keep track of the corresponding paper 1X (expanded) version and balance using 35/15 bands and use that as a model for rebalancing. For instance, if one has 100K in 50/16.67/16.67/16.67, that is equivalent to having 200K in a traditional PP. Restore the weights to their targets when the model indicates so. Not sure if this would work as it can be 2-3 years without rebalancing. Might work well in a trending market but not so much in a side market.

How do you guys re-balance?
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Nov 26, 2016 11:25 pm

I don't get too spun up about rebalancing...though for 3xETFs doing it is critical. I do somewhere between +\- 33-50% of the target (e.g. for 16.67 @ 11.11 or 8.33 and etc. on the upside). I'm more a believer in bands than time hacks for rebalancing. My basic method is to hit a band and then apply judgement as to when to actually pull the trigger. I'm there on stocks but plan on waiting for either the year end due to stock market seasonal positive tendencies and/or LTTs to stabilize/base. If stocks stall I will pull the trigger immediately since I'm right below the high side threshold.

In the perfect world you rebalance at a trend reversal point...but who can do that?

Just pick something you will stick with and remember rebalancing is about risk NOT performance.
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Re: 20% annual returns over 40 years...interested?

Post by jay » Mon Nov 28, 2016 11:58 am

With a BTB (by the book) conventional PP, Harry's recommendation was based on a 10% band. An example would be one asset moving +40%, another losing 4%, and the other 2 remaining flat. Resulting portfolio would be 25/25/35/15. This happens once every 2-3 years or so.

I total agree that for a such a conventional PP, one should not be too picky with their rebalancing strategy, as long as they stick to it. One can use a 5% band, 10% band, 15% band, yearly or even *never rebalance* and still do comparably OK.

However, I think that rebalancing is very critical to the success of a strategy that uses 3X leveraged funds. If I were to deploy such a strategy, I would use bands for the most part. But I would also make it a rule to rebalance once / year (if no band was hit that is) so as to not let the 3X drift too much. A 3X ETF moves +50% or -50% fairly frequently (once in less than a year I would say) so I would use a band that corresponds with such a move.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Nov 28, 2016 9:10 pm

I'm not so sure about end of year if one is rebalancing with bands. Seems like extra cost for no real solid reason to me, particularly if there isn't much of a spread between elements of the port. If one is kinda close to a band rebalance, sure why not if it helps you sleep better.
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Re: 20% annual returns over 40 years...interested?

Post by jay » Tue Nov 29, 2016 11:45 am

@Kbg, do you mind sharing what combo you run and how long you have been doing it?

I personally use a no cash PP (retirement account, no cash needed for a while). I am currently a third in each of TLT, SPY and GLD. Given PP's poor performance in the last 3 and 5 years, I am expecting better returns in the next few years and hence my interest in leverage, such as as a 50/16.67/16.67/16.67 Cash/TMF/SPXL/UGLD. That would be equivalent to a 2X conventional PP and its CAGR since Oct 17, 2011 be around +5%. Not too bad given that a traditional PP would've had a ~3.5% CAGR.

What in your opinion and experience should one be concerned about when implementing such a strategy?
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