2 x Permanent portfolio - Just for fun - or maybe a 401k solution

[captain3d]

I know this goes against many/every aspect of the permanent portfolio and in no way is this a suggested way to run your allocation but just for fun I was looking at the ETF's that claim to double the performance of any particular asset eg 2x the S&P 500.

I created a tracking portfolio in yahoo using...

DGP - 2x gold
SHY - normal cash
UBT - 2 x Long Bond
UWC - 2 x Russell 3000

and set up the purchase numbers for Jan 1st 2011. I already did the same thing for GLD, SHY, TLT, VTI so comparing the two today...

YTD approx

GLD +29%
DGP +59.5

SHY +1.5%

TLT +19%
UBT +39.5%

VTI - 4.5%
UWC - 14.5% (This is a more aggressive version of stocks than VTI and so lost more)

PP            + 11.2%
2 x PP      + 21.4% (not a bad 2 x match)

These choices might have some real value (beyond a VP experiment) for people who have limited access to the four sections. Many people have a lot of saving in 401ks with limited choices. Maybe some of these leveraged choices could be used out side a 401k to balance things up where less money is available. This should only be considered as a tempoary state while new money can be saved to create a real PP. Any way just a thought... eg.

Example Assets:
401k = $100k
Roth IRA = $30k
Taxable account = $30k

Available Total = $160k

Possible way to use available funds:
401k = $50k stock index
401k = $50k cash
401k = no long bond or gold :-(

Roth IRA = $25k UBT (2 x Long Bond)
Roth IRA = $5k  DGP (2 x gold)
Taxable $15k DGP (2 x gold)
Taxable $10k gold bullion

This would give a PP like allocation equal to $50k per asset as far as volatility is concerned, but still is not the real thing.

phil

[captain3d]

Yes, I always though most of the gains would come from the re-balancing.

[captain3d]

12.5% UGL (2X gold)
8.33% UPRO (3X stocks)
12.5% UBT (2X LTT)
the rest in cash (SHY)

is +8.9% year to date

Thats not too bad for a temporary solution and very impressive if you said you got 8.9 % with more than 60% in cash :-)

phil

[captain3d]

Thanks Clive. So using the leveraged funds really are a good (temporary) solution to create a PP like allocation even if most of your money is stuck in a 401k etc with limited choices.

Even HB suggested using similar ideas in '...Best Laid Plans...." at the time he suggested using gold options of zero coupon bonds to amplify their effect to create a better over all balance.

Now I must go and see what kapitall.com is. I have been looking for a way to graph a group of stocks into a single line.

phil

[Verto]

I've found morningstar's free portfolio manager to be rather helpful as well.

[Reub]

Clive, I respect your work tremendously. Aren't you showing the returns on this portfolio over just a few months? How does it fare over a longer time period?

[captain3d]

All very interesting Clive. now I have a reason for a VP...even more PP :-)

[arjking]

I'm seriously considering this.  I'm still a young investor and going forward I think most of my savings will go into a Roth or 401k.  In the 401k only total market index stock and bond funds are available.  So how do I maintain exposure to GLD and TLT if my Roth contributions are at max 5,000 per year.  I'd have to switch jobs ever few years to roll over my 401k to get access to the other ETFs.  I could use leveraged ETFs but what happens if GLD or TLT takes a major hit (ie. 50% decline) (as they inevitably will) then my Roth/401k ratio has gone down drastically and I'm even worse off then before.  I'd have to find a 4x leveraged ETF.  With Volatility being what it is, I think this is not sustainable.  Barring that, if I have to hold either GLD or TLT or even bullion coins in a taxable account, which do you think is better TLT with the interest or GLD with the 28% long-term capital gains tax rate?

[EdwardjK]

Captain3D,

Did you look at the volitility using 2x leverage?  Curious if that too "doubled" or whether is equaled the regular PP.

Thanks.

[captain3d]

I only casually check volatility by looking at the results each day on yahoo and yes they are typically 2X as you would expect.

I am sure it will be have problems long term but still have a little money on it for fun.

phil

[craigr]

Rule 7 from Harry Browne: Don't use leverage.

These leveraged funds have a lot of parts that can break at the wrong time.

[clacy]

Under a scenario where all 3 are down so quickly and significantly that the leveraged funds are at a total loss, the standard HBPP w/no leverage would be way down as well.  So in fact if you were using the set up that Clive outlined, you might actually come out ahead of a standard PP, depending on how rapid the decline was.

[arjking]

Rule 7 from Harry Browne: Don't use leverage.

These leveraged funds have a lot of parts that can break at the wrong time.

I agree with you.  But using leverage to maintain a certain exposure to GLD or TLT (Say your IRA is only large enough for 25% of your entire portfolio so you put 12.5% in each 2x leveraged GLD/TLT ETFs).  This is a different scenario than using leverage to increase returns.  Of course you would then have to balance that by maintaining a 25+12.5=37.5% cash position.  I imagine this as a long-term solution if say my 401k gets 5x bigger than my IRA, I could just overweight my 401k in a stable value fund then go to town with leveraged ETFs in the IRA.

[moda0306]

Using more tax-friendly & traditional forms of leverage, such as mortgage debt, to help fund IRA & Roth balances with normal PP assets seem to me to be the much better option to leverage into the PP.

[arjking]

Using more tax-friendly & traditional forms of leverage, such as mortgage debt, to help fund IRA & Roth balances with normal PP assets seem to me to be the much better option to leverage into the PP.

I don't have a mortgage.  But I don't see how a mortgage would help me anyway.  It would just suck up more of my monthly cash flow.  Then when it comes to move for career purposes I can't sell my house.  No thanks.  If there was a way I could get a mortgage without the property, that would be golden.

[moda0306]

A mortgage being the alternative to a) renting, or b) having a bunch of equity in a home.

I wasn't implying you go buy a house or pay a mortgage for nothing.

I'm basically making the point that low-interest debt can help people fund their tax-advantaged accounts and leverage into the PP.  These are accounts that can't be sued or bankrupcied away, and aren't looked at as "assets" for things like medical assistance and FAFSA.

Just something to keep in mind.

[craigr]

These 2x funds are not as simple as being discussed here. I need to find the articles talking about the operation of these funds and the risks they carry. It is not the same as doing margin, but carries unique risks particular to these funds. I would stay away from them.

Here is one article and there are others:

http://seekingalpha.com/article/35789-t ... raged-etfs

My advice continues to be to avoid leverage and never invest in something you don't understand. The 2x funds fail both of these basic tests for me personally.

[Wonk]

I know this goes against many/every aspect of the permanent portfolio and in no way is this a suggested way to run your allocation but just for fun I was looking at the ETF's that claim to double the performance of any particular asset eg 2x the S&P 500.

I had a similar thought and tracked the portfolios from TBT's inception in January 2010.  Here's an earlier thread on the topic:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

For what it's worth, I have yet to see evidence of decay in a 2x portfolio constructed as 4x25PP over 18 months.  I think it's obvious that there's a big difference between double the daily return and double the annual return.  The further out you look, the more divergent the two it will be.  IMO, what matters is tracking error and counterparty solvency.  Tracking error should speak for itself, but there's just no way to tell how solvent your counterparty is.  I don't have any money in these funds.

[clacy]

Wonk,

When I compare SSO (2x S&P) with SPY on Stockcharts.com and use their PerfCharts, looking back since June of 2006 (SSO's inception) I get the following numbers to date:

SPY  +6.42 gain

SSO  -32.5 loss

When looking at longer time frames, it appears that there is certainly a fair amount of decay.

That is a huge problem if using a PP type approach where you're looking for price appreciation over time in your overall portfolio.

[Wonk]

Wonk,

When I compare SSO (2x S&P) with SPY on Stockcharts.com and use their PerfCharts, looking back since June of 2006 (SSO's inception) I get the following numbers to date:

SPY  +6.42 gain

SSO  -32.5 loss

When looking at longer time frames, it appears that there is certainly a fair amount of decay.

That is a huge problem if using a PP type approach where you're looking for price appreciation over time in your overall portfolio.

I took a look and the longest frame I can get is from June 21, 2006-present.  I don't have exact numbers, but it looks like about SPY @ -3% and SSO @ -39%.  Thing is, leveraged etf decay is often referred in articles as a guarantee the fund will lose money over periods of months and/or years.  I haven't witnessed that for 21 months.  I agree that the longer we look on the horizon, the more divergent the two funds will be.  It's just a result of daily vs annual compounding.  In flat markets with high volatility--such as the SPY/SSO example above--I think we'll see the leveraged fund lose more money.  In trending markets, the leveraged funds appear more in sync with the corresponding index.  For instance, if you move the starting date forward 1 year to June of 2007-present, the returns are similar to what you would expect.  I'd like to see all three leveraged funds from the same 2006-2011 time frame to compare results.  Unfortunately, we don't have that data.

From what I can see so far, the success of employing a 2xPP rests mainly on tracking error and subsequent compounding over weeks, months or years.  I would also like to see a flat or down PP year, such as 1981 or 1990.  I'm guessing we would witness greater losses even during flat years.  At a very basic level, the 2xPP has performed as expected--almost exactly 2x the corresponding 1xPP on a daily basis.  That says nothing about what it will do in the future, just what I've witnessed from Jan 21, 2010-today.