ochotona wrote:
Gold may be overpriced... but maybe not. I think there is more downside risk than upside, so I trim my sails.
I don't speculate. I invest. I don't hop in and out. Don't describe my intentions falsely. I am happy to dollar cost average into a declining asset over a period of years
Don't do this as it's against the law of the HBPP authorities.
I do "speculate" with the PP concept with about 10% of my portfolio. I use leveraged ETFs for Stocks (SPXL) Bonds (TMF) and Gold (UGLD). I still get the correlation benefits which reduces volatility significantly from what you would normally experience with a 3X portfolio. Doing well, but still in the "forward testing" mode - started in June. I am also testing a Trendfollowing overlay - still as a long-only portfolio. But, I may hold significantly more cash than 25% at times.
Cully, you absolutely have to avoid long positions in 2X and 3X leveraged and inverse ETFs or ETNs... due to the DECAY phenomenon. Intraday is OK, going long is not.
Look at the first chart shown, it will frighten you to DEATH.
Ochotona - a valid concern under extreme volatility. I have studied these leveraged ETFs quite extensively and not all leveraged etfs are created the same - see http://seekingalpha.com/article/2966666 ... -and-p-500 for example. I have had similar experience with TMF. Strong trends, in less exotic indexes (i.e., stocks bonds and gold - not things like commodities, VIX, with "roll" issues) can yield very good results - for sure relegated to a trading account.
ochotona wrote:
Cully, you absolutely have to avoid long positions in 2X and 3X leveraged and inverse ETFs or ETNs... due to the DECAY phenomenon. Intraday is OK, going long is not.
Look at the first chart shown, it will frighten you to DEATH.
"In a recent article I showed that 99.7% of the variability in monthly gains for a 3x S&P 500 ETF can be explained by net growth of the index. Volatility explains an additional 0.2% of the variability."
Don't get me wrong, being on the wrong side of 3x leverage is a freight train looking for a stalled mini-van. However, math is math. It's all about my favorite two words...path dependency. I personally believe a 3x ETF version of a PP deleveraged to 1x will beat a regular PP over the long haul due to the very 3x ETF mathematical properties feared (but not understood by most)...and now for the tour de force, (drum roll please) it has trounced it since 2012 (first year when 3 non cash elements had 3x ETFs)
ochotona wrote:
Oh my, very small nuclear weapons.
No nukes. I biased the results as SPXL was weighted 8.34%
Seriously though, I only think PP will outperform using the 3x delevered approach based on the volatility of its components and the math...it really is path dependent and neither of us know the answer to that question so a debate is utterly futile. I've written extensively about this in the VP 20% thread.
Hmm, is this the enfabled leverage parity with cash 3x in size but everything else 3x less in size but with 3x leverage?!! Woah, Nelly!
"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!
Hmm, is this the enfabled leverage parity with cash 3x in size but everything else 3x less in size but with 3x leverage?!! Woah, Nelly!
I was wondering if anyone would pick up on this. A "real" PP has had around a 25% max DD we think via backtesting. What are the odds of everyone of these 3x ETFs going to zero simultaneously? I think zero. I therefore ask, which version is more "risky?"
Hmm, is this the enfabled leverage parity with cash 3x in size but everything else 3x less in size but with 3x leverage?!! Woah, Nelly!
I was wondering if anyone would pick up on this. A "real" PP has had around a 25% max DD we think via backtesting. What are the odds of everyone of these 3x ETFs going to zero simultaneously? I think zero. I therefore ask, which version is more "risky?"
So this is just a way to essentially leverage cash? Which rebalance bands do you use?
Kbg wrote:
I was wondering if anyone would pick up on this. A "real" PP has had around a 25% max DD we think via backtesting. What are the odds of everyone of these 3x ETFs going to zero simultaneously? I think zero. I therefore ask, which version is more "risky?"
I just did a quick simulation of a 366-day rebalanced 3x leverage/8.333% since 1968 and its 9.81% CAR and -22.28% MaxDD. Vanilla PP is 7.94% CAR and -22.36% MaxDD. Not to be compared to Peak2Trough.
EDIT: Well, this is certainly interesting...
~SPY Long 2/4/2008 110.2 2/3/2009 68.55 -37.79% -113.38%
Wouldn't that imply a wipeout of the 3x ETF? Is that possible?
If only this was real gold... Very Scrooge McDuck worthy.
~Gold2 Long 2/5/1979 238.8 2/4/1980 672 181.41% 544.22%
Last edited by MachineGhost on Tue Mar 17, 2015 9:57 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!
ochotona wrote:
Cully, you absolutely have to avoid long positions in 2X and 3X leveraged and inverse ETFs or ETNs... due to the DECAY phenomenon. Intraday is OK, going long is not.
Look at the first chart shown, it will frighten you to DEATH.
In a recent article I showed that 99.7% of the variability in monthly gains for a 3x S&P 500 ETF can be explained by net growth of the index. Volatility explains an additional 0.2% of the variability.
Don't get me wrong, being on the wrong side of 3x leverage is a freight train looking for a stalled mini-van. However, math is math. It's all about my favorite two words...path dependency. I personally believe a 3x ETF version of a PP deleveraged to 1x will beat a regular PP over the long haul due to the very 3x ETF mathematical properties feared (but not understood by most)...and for the tour de force, (drum roll please) it has trounced it since 2012 (first year when 3 non cash elements had 3x ETFs)
25%x4 version (SHY/TLT/GLD/SPY) annual rebalance = 2.89% CAGR/8.77 DD
I think you continue to do outstanding analysis - and some of your work very much reminds me of the "he who shall not be named, Clyde".
I do want to point out, though, that your 3X, down leveraged portfolio isn't really a 1X PP. It is more like a 1.3X portfolio. I think that accounts for the extra CAGR.
That said, the fact that it has a lower draw down is most impressive - and of course speculative.
Again, nice work - and I very much appreciate your thoughtful and well researched posts.
Nice! One point, I fail to see the difference between a 26% DD and a 25% wipeout...assuming you will stay invested, no difference other than a mental hang up maybe.
I totally believe that from time to time an element could go to near zero...it's all in the history for sure. But no it can't go to zero, a 3x actually degrades less comparitively in severe DDs compared to a 1x. It is like a logarithmic curve on both ends. However, on the climb out if you rebalance it is way easier to make up the difference with a 3x.
This all assumes the issuer doesn't fold the ETF or spreads get bad. I had to pack in UBT and move to TMF last year...and then I started asking myself why more "dangerous " 3xs were trading way more than 2xs.
Last edited by Kbg on Tue Mar 17, 2015 11:01 pm, edited 1 time in total.
ochotona wrote:
Cully, you absolutely have to avoid long positions in 2X and 3X leveraged and inverse ETFs or ETNs... due to the DECAY phenomenon. Intraday is OK, going long is not.
Look at the first chart shown, it will frighten you to DEATH.
In a recent article I showed that 99.7% of the variability in monthly gains for a 3x S&P 500 ETF can be explained by net growth of the index. Volatility explains an additional 0.2% of the variability.
Don't get me wrong, being on the wrong side of 3x leverage is a freight train looking for a stalled mini-van. However, math is math. It's all about my favorite two words...path dependency. I personally believe a 3x ETF version of a PP deleveraged to 1x will beat a regular PP over the long haul due to the very 3x ETF mathematical properties feared (but not understood by most)...and for the tour de force, (drum roll please) it has trounced it since 2012 (first year when 3 non cash elements had 3x ETFs)
25%x4 version (SHY/TLT/GLD/SPY) annual rebalance = 2.89% CAGR/8.77 DD
I think you continue to do outstanding analysis - and some of your work very much reminds me of the "he who shall not be named, Clyde".
I do want to point out, though, that your 3X, down leveraged portfolio isn't really a 1X PP. It is more like a 1.3X portfolio. I think that accounts for the extra CAGR.
That said, the fact that it has a lower draw down is most impressive - and of course speculative.
Again, nice work - and I very much appreciate your thoughtful and well researched posts.
But .25+.25+.25+.75=1.5 exposure isn't a 1.3x PP. It's a 1x pp with an extra 50% sitting in cash. That's kinda why I said it "leverages cash" above.
In a recent article I showed that 99.7% of the variability in monthly gains for a 3x S&P 500 ETF can be explained by net growth of the index. Volatility explains an additional 0.2% of the variability.
Don't get me wrong, being on the wrong side of 3x leverage is a freight train looking for a stalled mini-van. However, math is math. It's all about my favorite two words...path dependency. I personally believe a 3x ETF version of a PP deleveraged to 1x will beat a regular PP over the long haul due to the very 3x ETF mathematical properties feared (but not understood by most)...and for the tour de force, (drum roll please) it has trounced it since 2012 (first year when 3 non cash elements had 3x ETFs)
25%x4 version (SHY/TLT/GLD/SPY) annual rebalance = 2.89% CAGR/8.77 DD
I think you continue to do outstanding analysis - and some of your work very much reminds me of the "he who shall not be named, Clyde".
I do want to point out, though, that your 3X, down leveraged portfolio isn't really a 1X PP. It is more like a 1.3X portfolio. I think that accounts for the extra CAGR.
That said, the fact that it has a lower draw down is most impressive - and of course speculative.
Again, nice work - and I very much appreciate your thoughtful and well researched posts.
But .25+.25+.25+.75=1.5 exposure isn't a 1.3x PP. It's a 1x pp with an extra 50% sitting in cash. That's kinda why I said it "leverages cash" above.
I think you continue to do outstanding analysis - and some of your work very much reminds me of the "he who shall not be named, Clyde".
I do want to point out, though, that your 3X, down leveraged portfolio isn't really a 1X PP. It is more like a 1.3X portfolio. I think that accounts for the extra CAGR.
That said, the fact that it has a lower draw down is most impressive - and of course speculative.
Again, nice work - and I very much appreciate your thoughtful and well researched posts.
But .25+.25+.25+.75=1.5 exposure isn't a 1.3x PP. It's a 1x pp with an extra 50% sitting in cash. That's kinda why I said it "leverages cash" above.
.75 + .0833 + .0833 + .0833
?
Well, now I'm confused. My thinking was that each .0833 is a 3x fund, so its .0833*3=.25 of exposure to that component.
But looking back, Kbg is discussing 3x funds, but wrote TMF/UGLD/SPY, so I must have misunderstood along the way. My only guess is he meant to type the 3x symbols because otherwise there's no way the CAGR could be higher for that portfolio.
In fact, if he really meant the 1x symbol, it wouldn't be a 1.3x fund, it would be a 1/3x fund.
Last edited by dragoncar on Wed Mar 18, 2015 2:01 pm, edited 1 time in total.
Kbg wrote:
This all assumes the issuer doesn't fold the ETF or spreads get bad. I had to pack in UBT and move to TMF last year...and then I started asking myself why more "dangerous " 3xs were trading way more than 2xs.
I was actually in the MACROShares Natural Gas Trust before it folded and I moved to GAZ.
So long as it can't reach $0 and be delisted, then all is good. I see no reason not to implement this except that the leverage won't quite be 3x. I want the cash allocation percentage to match the actual leverage exactly. What do your studies say?
"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!
Sorry for the confusion. I went back and hopefully did a better job of explaining in my original backtest post. If this doesn't clear it up, post whatever clarifying questions you may have.
MG,
I'm not quite sure how to answer the question of exact leverage. If the non-cash assets appreciate overall your "leverage" at the portfolio level is going up because more of it is now in the "leveraged category." The only way you could peg it exactly would be to rebalance daily. Being "more" leveraged at the portfolio level is exactly the problem I'm hoping to have (a lot). The real issue is how often do you want to hit the reset button?
With regard to leverage in the 3x instruments themselves and at the portfolio level, all we know for certain is that the more we rebalance the closer we stick to whatever it is we are tracking. The less we rebalance the more tracking error there is. As a general rule in a trending market up or down you don't want to rebalance and in a non-trending market the more you want to rebalance if your goal is improving performance/the bottom line. A nice quote from Direxion...
Ultimately, Daily Leveraged Funds respond to gains by becoming more aggressive, while they respond to losses by becoming more defensive. In markets which are directional, this can be an advantage, in volatile markets which lack direction, this can be a disadvantage.
Broken record time...path dependency. If we do our homework we know exactly what to expect out of this PP approach given things that could happen, but we still know nothing about what is going to happen in the future.
Me personally, I think the the big factors one should focus on are:
1. Taxes...those aren't going away. How often should I rebalance?
2. Can I mentally and emotionally NOT focus on the four instruments but stay focused on the portfolio? If you can't watch 8% get whittled down to 1% or less, this is not for you.
Note: 33% down = 8% to 0% and 92% of your former portfolio while 33% up = 8 to 24% and 116% of your former portfolio
3. Does counterparty risk freak me out?
#1 is immutable, #2 is about you, #3 is about risk
I can't see this replacing the PP. It's a VP play. Too many confounding variables. I'll go live with this soon. Too bad there's no commission-free leverage ETF's.
EDIT: What is wrong with this picture? The blue is a 3x 25x4 and the pink is a 3x 8.2x3 with rest in cash. There's no rebalancing but that shouldn't matter for relativity, or does it?
Last edited by MachineGhost on Thu Mar 19, 2015 10:25 am, 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!
stuper1 wrote:
What are the CAGR and DD for 50% cash and 16.67% in each of the 3x funds?
Easy, one third to half the return and twice the maximum drawdown.
"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!
? 
Very Scrooge McDuck worthy.
