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

Post by dragoncar » Tue Nov 29, 2016 2:45 pm

Pulled the trigger on a rebalance. My 3xSPY was bouncing around 34-35% of exposure for a while. I was way up for a while, but now back to square one (very modest gain).
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Re: 20% annual returns over 40 years...interested?

Post by Cortopassi » Tue Nov 29, 2016 3:05 pm

dragoncar, I am curious, so the 3x SPY about doubled in the timeframe, how did the 3x gold and bond ETFs do?
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Tue Nov 29, 2016 10:43 pm

Cortopassi wrote:dragoncar, I am curious, so the 3x SPY about doubled in the timeframe, how did the 3x gold and bond ETFs do?
These numbers will be a bit off since I already rebalanced, but:

SPXL +39.07%
TMF -10.52%
UGLD -12%

All acquired 03/01/2016


(so the above would make SPXL 33.4% exposure, but as I said it was bouncing around and probably a bit higher intradray)

If I'm doing something wrong, let me know. I basically started with 50% cash and 1/6 of the 3x ETFs
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Tue Nov 29, 2016 11:02 pm

jay wrote:@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?
My specific mix is: 45% SHY, 16.67 SPXL/TMF, 16.66 UGLD, 5% XIV

Total Rtn 28.9%
2014: 11.98%
2015: -9.99%
2016 YTD: 25.61

These figures are net of all expenses. A pristine backtest from 1/1/14 to today annually rebalanced is 7.13% CAGR/-18.25% Max DD. I have no idea what my actual Max DD is. I could figure it out, but I don't want to expend the energy. This compares to a backtested regular PP of 4.34/-6.93 during the same time period using SHY, SPY, TLT and GLD. Running the port since first possible (2012) the stats are 8.37/-18.25 vs. 3.28/-7.95. I've posted this as well...please note the impact of path dependency. From 2014 we have not achieved 2x leverage. Since 2012 we have achieved 2.55x leverage on the upside and 2.29 on the downside. And in 2016 we are pretty close to right at 2x on both sides. My "use bands with judgement approach" has outperformed the straight backtest: 28.9% vs. 22.2%.

I would say the below are major concerns.

1. The future is not like the past though the past has been pretty crazy and the PP has held up as advertised.

2. Getting slaughtered by a big multi-asset drawdown while being leveraged up.

3. #2 happens and I bail.

4. Getting too "predictive" and messing with the PP portfolio mix in a dangerous way. Categorically, I do not recommend increasing leverage beyond 16.67% ish. If you can't stand an asset reduce it or turn it into whatever you are using for cash.

5. Long lasting positive correlation between bonds and stocks (2-3 years or so).

6. I have mentioned repeatedly that if one can not ignore a single asset's performance then they absolutely should in no way invest in a 3x ETF leveraged PP. Assuming an annual rebalance, the history is clear that one will experience an asset going to zero not too infrequently. I don't have this problem personally as I'm able to keep my eyes focused at the portfolio level. Others may find this hard to do emotionally and should not underestimate their ability to deal with it.

My personal expectations are stock like returns with less "major event" volatility and pretty close to 2x of whatever the standard PP will give us going forward. Since 2012 we have definitely been kicked in the junk compared to 100% stocks and we are pretty close to a 50/50 stocks/cash mix but with triple the drawdown. If anyone has paid attention, basically the way a PP works is it gets stomped during a good bull market for stocks and then makes it up during crisis and/or a bear market. I don't expect anything different going forward. If your starting point is 2012 this portfolio sucks. If your starting point is 2008 it is looking pretty good....slightly better performance half the drawdown of an all stock buy and hold.

To repeat this is an aggressive growth portfolio, not grandma's stable retirement withdrawal PP...and of course, all the above is for educational purposes only and folks should seek the assistance of a professional for any real advice they may need.
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Re: 20% annual returns over 40 years...interested?

Post by jay » Wed Nov 30, 2016 2:23 pm

Thanks for your reply Kbg. Good discussion.

I am leaning towards a 50/16.67/16.67/16.66 version and will later consider XIV if/when a correction in equity markets occurs.

Going back 10 years, and including today's drop, the current DD of the conventional PP is ~7.5%. There are very few (5-6) drawdowns (depending on starting time and rebalancing options) that are 7.5% in the last 20 years. The PP is definitely in oversold territory unless a repeat of the ~15% drawdown we had in 2008 is around the corner. Still, the odds are in one's favour to be long the PP or a leveraged version of it.

Let's see what the six months will bring.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sun Dec 04, 2016 2:33 pm

Jay,

It is good you are looking at the numbers hard. I definitely recommend folks run 3x simulations which assuming you have the data is easy to do in Excel. You get a good feel for how bad the portfolio can behave as well as individual elements of it. One also understands very very quickly why it is important to have a big wad of cash. It is imperative to be able to recharge and take advantage of mean reversion.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sun Dec 11, 2016 10:57 pm

Highly likely I will pull the trigger on a rebalance tomorrow...but I thought I'd throw some real numbers out there to give folks a sense of the volatility and leverage variation possible. Looking at TNA (actually I posted my portfolio incorrectly. I split the stock portion between SPXL and TNA 50/50 for the stock allocation of 16.67%). TNA was essentially flat from Jan 15 to Jul 16...but check these numbers out through 12/09/16.

01/08/15 Open TNA
02/11/16 Open TNA

IWM 19.54%/TNA 37.00% - 1.89x leverage
IWM 47.56%/TNA 192.57% - 4.04x leverage

My best open position is a batch of XIV @ +190.67% bought on 2/11/16
My worst open position is a batch of UGLD @ -29.06% bought on 1/8/15

Since beginning in Jan 2014
My best closed position returned 56.20% (XIV)
My worst closed position returned -19.97% (TMF)

As an extra special treat to the dedicated readers of this thread I figured out my max DD which happened from Feb 1 15 to the end of the year...16.14% Max DD. I have 30.3% more money in this account than when I began net of all costs. By way of comparison, 100% SPY has returned 30.83% with a 13.01% max DD and a standard PP has returned 12.16% with a 7.65% max DD annually rebalanced. The latter figures do not include trading and account costs. So for me the performance of the portfolio is a smidge less than 2.5x leverage.

Biggest lesson learned thus far...suck it up and rebalance even if it makes you want to puke.

Trigger pulled (update)
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Re: 20% annual returns over 40 years...interested?

Post by TrickPony » Thu Dec 15, 2016 1:02 pm

"These are the times that try men's souls." I think Thomas Paine must have been thinking about the gold position of the 3X portfolio.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Dec 15, 2016 2:06 pm

TrickPony wrote:"These are the times that try men's souls." I think Thomas Paine must have been thinking about the gold position of the 3X portfolio.
Yup it can. Who knows what will happen in 2017 but I was super glad I held my nose and rebalanced at band limits last year. Bought a bunch of ugly (UGLD) early and sold it high mid year. Rinse and repeat would be nice. Indeed that trip is pretty much what made 2016 a good year. I suspect there is more gold pain to come this go round, but what do I know?

Remember: We never, ever do this portfolio if we like to fixate on single asset classes. Our bet is on the PP mix continuing to work and taking advantage of the non-intuitive compounding math behind the leveraged versions of highly volatile PP components.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Dec 31, 2016 9:11 am

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 12/30/16

2.5x = 10.83%/-24.89%DD (Quarterly rebalance...12.10/-22.53%DD)

2x = 7.48%/-15.84%DD (Quarterly rebalance...14.61/-12.97%DD)

1.5x = 4.14%/-10.87%DD (Quarterly rebalance...6.08/-7.87%DD)

1x = 5.53%/-8.05%DD

Personal mix = 26.43/-10.28% DD

S&P 500 TR: 11.26%/-9.91% DD (SPY 12%/-10.32%DD)

Comment: Going back it appears I didn't post a November update. My apologies. If you go back to the August update it will be pretty clear the back half of the year was not super pleasant for this portfolio. The high point for my personal port was on 9/7/16 where it hit 36.90% and went down to 22.82% by 12/01/16 before recovering. However, this year's performance is HUGELY instructive in terms of portfolio management. If you will note, my performance is about triple the 2x version. Some of this is because it was a monster year for XIV but the large majority was due to rebalancing at timely points in the year. I rebalanced the port's main elements on Feb 11, Jul 1 and Dec 12. XIV rebalances happened in Feb, Mar, Aug and Dec...Feb was a buy and all the rest were sells. Just straight quarterly rebalancing helped all of the ports by quite a bit.

When I first started this port I had a big debate with myself on whether to do quarterly, annual or band rebalancing and decided to go with bands and some judgement. But I don't over think it. My rebalancing thought process goes like this: Question 1: Has a band been hit. If no, do nothing. If yes, time to look at rebalancing. Question 2: Has the cratering asset "appeared" to stabilize or is it still spiraling down in a ball of flame. If stabilized, pull the trigger. If spiraling, wait. Question #1 is FAR more important and has FAR more weight in my decision.

I will leave it up to the reading public as to whether or not this port beat the S&P 500 this year. The pessimist would go with 2x not rebalanced and say no, the optimist would go with the quarterly rebalance and say yes. For me, I'm going with a crushed it. :)

But by way of full disclosure and to illustrate my port's "tracking error" vs. SPY.

2014: +.56%
2015: - 10.24%
2016: + 14.43%

Over the three year period I'm beating the SPY by a whopping .8% (30.07 vs. 29.27). Yeah, that's lots of work for barely beating B&H of an index fund. On the positive side, the standard PP with ETFs is up 12.74% over that same time period. For those paying attention that is 2.360282574568289x leverage. However, on the negative side going with a 2x version since 2014 has NOT delivered 2x performance at all but HAS delivered 2x the max DD if you are just annually rebalancing. In sum, this port requires paying some attention to/active management and rebalancing is a must. I'm looking for our first bear market since I started anyway to see if I'm going to stick with this for multiple (more) years. If we do OK during a bear, I'm in for the long haul. If not, we have to ask ourselves if it is possible for mere mortals to beat a no-brainer no effort B&H of a cheap index fund. Heck, even lots of hedge fund managers can't do it. Perhaps we are too overconfident? My hope is February's PP vs. the S&P 500 is what we can expect in a bear...S&P 500 down 10% 2x PP up 9% in the space of 1.5 months.

Well gang...that's the 2016 wrap up. Most likely I'm going to move to a quarterly update next year with perhaps an additional post here and there if I think there is something going on that is worth commenting on for teaching purposes.

May 2017 bring you good fortune...kbg
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Dec 31, 2016 9:14 am

Oh yeah, one more important point that merits its own separate post...compare the 2.5x and 2.0x versions with rebalancing...that is about as clear a picture as it gets as to why you MUST, MUST, MUST have a big wad of cash as part of this port.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Dec 31, 2016 5:25 pm

Well I hadn't seen Craigr's big announcement until just now. Perhaps this will be the last post for this thread from me.

Best wishes to all in their future endeavors.
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Re: 20% annual returns over 40 years...interested?

Post by Mr Vacuum » Sat Dec 31, 2016 5:50 pm

This has been a fascinating thread. Thanks for all the ideas, backtests, and reports, Kbg.
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Sat Jan 14, 2017 10:29 am

Read Fred Piard's ETF article and study the data table. He does this monthly...good education for this style of investing.

http://seekingalpha.com/article/4036714 ... oard?ifp=0
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Re: 20% annual returns over 40 years...interested?

Post by clacy » Mon Jan 16, 2017 10:35 pm

Kbg wrote:Read Fred Piard's ETF article and study the data table. He does this monthly...good education for this style of investing.

http://seekingalpha.com/article/4036714 ... oard?ifp=0

Nice! Thanks for that
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Jan 23, 2017 1:08 pm

Hey this will be fun to type: I'm outperforming the SPY this year by 600+% thus far. .67% to 4.74%. To have obtained these returns people had to eat their spinach, err I mean buy UGLD when it needed to be rebalanced into.
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Re: 20% annual returns over 40 years...interested?

Post by dragoncar » Mon Jan 23, 2017 5:46 pm

I did rebalance into gold/TLT but so far it's overall negative. Nice to beat the S&P over a 2 month period, but that can happen with almost any holding
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Mon Jan 23, 2017 7:16 pm

dragoncar wrote:I did rebalance into gold/TLT but so far it's overall negative. Nice to beat the S&P over a 2 month period, but that can happen with almost any holding
Apparently you missed my ;)
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Re: 20% annual returns over 40 years...interested?

Post by Kbg » Thu Feb 02, 2017 10:31 pm

More reading material on 3x ETF leverage...good demo

http://throwinggoodmoney.com/2017/01/th ... aged-etfs/.

My PP was up 4.76% in Jan with a normal PP up 2% (I've read). Anyone else care to share some results?

Not too much further and my account will hit a new high...currently still in drawdown mode though with the high back in August with the bottom of the current crater in November.
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