Quantitative Wealth Protection

Intro To Trend Following: Quantitative Wealth Protection

Learn how to avoid the downside of the market with simple, time tested, quantitative trend following. You don’t need to be a genius.

Using the S&P 500 as an example I explain:
-The problems With buy & hold investing
-How trend following can protect your wealth (from drawdowns and volatility)
-How simple trend following works.

My Blog Post which covers the lost decade between 1965 and 1975

Portfolio Visualizer for Trend Following Backtest

Worlds Longest Trend Following Backtest by Alpha Architect

Avoiding The Big Drawdown by Alpha Architect

Peter Schiff Radio

Nikkei 225 Index Chart

Meb Faber’s S&P 500 Chart With 10sma

Hey everyone what I got open on my screen right here is the last decade of the 2000’s particularly the S&P 500 as represented by Vanguard’s S&P 500 mutual fund that tracks the index. Through the 2000’s, the decade where stocks went nowhere horrible decade for investors you started out with a $10,000 investment in 2000 January first it was ten years later at the end of 2009. You’d lost basically 10%t of your money as you can see right there. So not a fun time to be a you know an investor and you had some big drawdowns, you went you know from having 10,000 down to 6000 then back up and then you lost 50% of your money in the financial crisis and then you kind of started rebounding.

So I started my investing career as an investor in the early 2010’s right after this happened. So you know I was looking at asset allocations and no matter which asset allocation you ultimately see something like this you know. 10 year period things gone nowhere lots of drawdowns if it doesn’t look appealing, I wouldn’t want to be an investor and I still don’t so I refuse to be an investor that is you know investing right here and then losing 40% of my money. That’s got to get painful feeling, I haven’t gone through that yet and I hope I don’t and I plan on avoiding it quantitatively as I’m going to explain here nor would I want to be you know up here with 12,000 in my brokerage account and then get down there below 6000. Got to be a horrible feeling you know this volatility in the drawdown is just not something that most people can sit through and I think a lot of investors say yeah no problem you know I can ride out the drawdowns, I’m in it for the long term but when push comes to shove it just doesn’t work out for them. They can’t do it or they don’t, they might stay invested but they might not be investing more money in for buy and hold the work you have to be investing money you know at the drawdown periods. But for many of us you know our income goes down when we’re in this periods.

So what can we do to avoid the drawdown? Now I’m going to bring up you know a couple of the profits as I call them of the investing world, and I don’t believe any other you know any other garbage one of which is Peter Schiff. Peter Schiff is one of those guys that believes the market is going to collapse, the economy is going to go to shit and only he knows how to protect you from it Now that stuff is junk I don’t think Peter Schiff knows anything more than anyone else, in fact I say that he knows a lot less than anyone else you know but these guys try to pump you into buying gold or some special foreign stock. Usually through some high priced, overpriced investment and they kind of have this following that of people that believe they’re like a god of some sort. That’s just ridiculous, I don’t want to go down that road. I did follow Peter Schiff for a couple of years you know way back you know before I even started investing but the one thing about him is he’s consistently wrong he doesn’t rely on any data he is just a talking head making noise you know and publishing books and market news and all kinds of commentary.
Ultimately his end goal is just to get you into his funds and his investments to make money. So I knew that that wasn’t something I wanted to get into so I researched and kept looking for ways of quantitatively avoiding periods you know like the lost decade here and that led to Trend Following. So trend following basically means that you go with you know the market, so when the market’s going down you stay out of it when it’s going up you get back in and you can do this with a simple moving average. You see the 10 month simple moving averages is the red line here, so if the S&P 500 is above its 10 month simple moving average you’re in it you’re invested. When it goes below its simple moving average and it’s in a down trend you get out and you go to cash. It’s very simple to do, it only requires you know trading once a month you can just look once a month S&P 500 up the very first day of the month. S&P 500 above its moving average you stay in, S&P 500 below it you go to cash or an alternative asset as I will explain.

So you know here you see a period from 1990 to 2012 and this is you know by Med Faber. Med Faber had done a lot of research on Trend Following and has published quite a few papers but let’s see what it looks like in practice. So first we’re going to remove that. Time period I’ve got set from 2000 to 2017, so if the 10 month simple moving average. Or excuse me if the S&P 500 is above its 10 months simple moving average you’re invested as you would be here. One in the 10 month simple moving averages below it you’re out of it you’re invested in cash and you can see that from a time period of 2000 to present the try to follow it started use absolutely kick the ass of buy and hold. You know buy and hold out a cumulative or compound annual return of four point seven nine percent timing portfolio up at nearly eight percent.  Not to mention the draw down much lower only a 16.7% drawdown versus nearly 51% drawdown for buy and hold and sharp ratio which measures basically risk adjusted return is much higher than buy and hold.

Now for some people sitting in cash is an optimal you know you can get some return in our asset classes that do get returns particularly those that have a low or negative correlation to stocks and that would be bonds. Particularly Treasury bonds but for the sake of this I’m just going to show it with a total bond market index by Vanguard.  So you know when you’re looking at it let’s go back to the morning star right here.  Through the last decade bonds pretty much went up, they had a little bit more momentum as things were going down that’s to be expected with a lower correlation. So rather than going into catch you could go into bonds and get a little bit of you know kind of extra returns, little bit of extra returns instead of sitting in cash. So a plug in the you know Vanguard Total Bond Market Index and we’ll redo this and you’ll notice that the annual growth rate goes up a little bit, not a lot just a little bit. Up just over one and a half percent gets you some more returns rather than sitting in cash you sit in a relatively stable asset so you know investing in the stocks when they’re above the simple moving average and then going to bonds when you’re below it has done pretty well. It’s gotten you nearly a 10% return, we’ll call it nine and a half that is what it is you know for the last 17 years or so and minimize your drawdown.

But I don’t want you to think that this trend following strategy is some holy grail, it doesn’t. It’s not here to help you beat the market you know the reason why I’m showing this period from 2000 to 2017 is because there’s a lot of kind of up and down with the market sideways going. When you go into a bull market the trend following the lags behind it so if we go from the period of 2010 to present you’ll notice that the buy and hold portfolio is four and a half, five percent above an annual return above the trend following portfolio. So it’s doing well, it’s a bull market buy and hold is working. So the trend following strategies really work when the market isn’t a bear market and that’s when they shine. Over the long term they equal out, you’re going to get about the same return you know over a long period of time just without the drawdown and volatility. So to illustrate that we’ll set this back as far as this thing can go which is 90’s or, late 8’s excuse me based on the data available for the S&P 500 mutual fund. And you’ll see you know during the bare run of the 80’s and 90’s into the dot com bubble the buy and hold you know index of the S&P 500 just absolutely kicked the trend of followings ass. There are times here when people are probably saying trying to follow him doesn’t work but when the skies go grey and the bears came to town the trend following strategy started to shine and as a buy and hold you know dropped the trend following took off and you know through the end of the 2000 with the financial crisis it still you know went on.

Now we don’t know where our current bear, excuse me bull market is going but it could catch up to the trend following strategy. Trend following isn’t a 100% of the time a winning strategy but it gives you some protection so that you have money when things go south you know. Some of the big things with buy and hold investing is that you’re supposed to be continually investing money but the reality is when we’re in these bear markets your income is lower. Psychologically you don’t want to invest, you want to hold on to cash. So it doesn’t work, you’re not investing when the market is down as you should be you know through buy and hold strategy. The trend following works because it keeps your sanity together, you don’t have to live through the drawdowns I tend to think of it like insurance. When there’s a bull market you’re spending a little bit of money in the terms of percentage annual return to avoid losing money later. That’s how I see it, it’s like an insurance policy to me. When the market goes down I know I’ll have money there to use for whatever I need to use it for or just for my own sanity.  And that’s something I’m willing to trade and I think many investors are, I think that the current trend of flocking towards buying old investments is going to go south once we run into a bear market here because many investors are just. Overestimating their risk tolerance they say yeah I’ll be able to live through these I’m in it for the long haul. But when things go down you know 10% down 20% they’re probably going to want out or they’re going to wish they were trying to follow.

The other thing too is not all markets go up forever. There’s the case of Japan, Japan and the Nicki index. It kind of peaked in the in the late 80’s and it never recovered since then and pauses camera for a second while I pull it up. Alright so here’s the Nicki 225 Japan’s index. It peaked right here just before 90, it was up here and it never recovered since then so you know I bet there’s a lot of people in Japan saying Buy and Hold just doesn’t work look at our economy. And there’s nothing to say that the United States can’t go Japan, there’s nothing to say that the S&P 500’s trend is going to keep going up. So a lot of the investors that were you know back in the Japanese markets probably wish they were trying followers now I believe the S&P 500 in the U.S. equities will continue this up trend for the foreseeable future but they might not. You know they always say past is not prologue when it comes to investing returns and while the S&P 500 has had a great return what if it doesn’t? And that’s where trend following comes in and trend following offers some protection, it’s 100% quantitative. You know you can look at the strategy the first day of the month if it’s above the simple moving average you go into your stocks, if it’s below it you go into bonds.

There’s nothing hearsay, there’s no punditry, there’s no talking heads like Peter Schiff telling you oh it’s going to crash. You don’t care you don’t even need to watch the news in fact I suggest you just do not watch the news. I don’t, I don’t care what the news says about the S&P 500 but let’s just see what we’ve got here. Let’s just see what it says today, S&P 500 just did something that is meant gains 100% blah, blah, blah. This stuff doesn’t matter, with trend following all you need are two simple numbers, the current price or total return and the simple moving average and you’re either into your investment or you’re not. So yes you could try to follow S&P 500 but there are ways also to make it more diverse and trend follow other markets, you know we can look and see that this not only appears robust outside of time as we’ve seen here but through other markets as well. So we can take a merging markets for example and you’ll notice.  Merging market data only available from 96.  And it gets whipsawed a lot more but you avoided a lot of the drawdowns associated with a more emerging markets here and you’ve actually had a higher total return again we don’t know if that is going to happen going forward. We can’t guarantee you’re going to have a higher total return but you can you know avoid some draw downs.

We could do the Eva index, other foreign stocks. I did this wrong. Out of Market asset of bonds.  From 2003 again foreign stocks you’d have avoided the big drawdown of the financial crisis and avoided a lot of the, you know up and down volatility since then to have a higher total return. Trend Following works across nearly every asset class and you know if they take my word for it there’s Alfa Architect has done a ton of back tests on it, they’ve even got some back test going back as far as the 20’s with data on it showing how robust it is.  So all linked to those in the show notes and let me know if you have any questions you know I think there’s a lot of investors out there that if they knew about trend following and knew how easy it was they would do it and that’s what I’m trying to tell more people about it.  Thank you guys.


trend following with dollar cost averaging

Trend Following With Dollar Cost Averaging (it doesn’t look that awesome)

Simple, quantitative trend following can help you avoid the drawdowns and black swans of the market… considering you can stick to the rules.  This is highly noticeable when you look at a chart showing the growth of $10,000, especially over any time period including the ‘lost decade‘ of the $2,000s. Read more


Goals Based Investing – Stay Fully Invested

Goals Based Investing – three words that are changing the wealth management landscape in the 21st century. Until now, the wealth management industry used the ability to beat benchmark returns as the yardstick for performance. This approach to investment management worked well in boom cycles but posed significant challenges for advisors during the bust cycles. This was especially true during the 2007-08 financial crisis when investors felt their trusts betrayed when advisors still charged them advisory fees on portfolios performing poorly. As a result, goals based investing emerged to put client investment goals at the centre piece of advisory. The technological innovation in web-based advisory services have further popularized the idea of goals based investing as robo-advisors use this approach to offer tailored portfolio solutions for each of an investor’s investment goals.

Under the goals based investing (GBI) approach, each investment goal is independent of the other and has its own horizon and risk/reward profile. An individual saving and investing money does so to meet a certain financial obligation in the future, not to beat S&P500 by 200 basis points or more. Therefore, the premise of GBI approach is grounded in asset-liability management, which demands that future liabilities be appropriately funded. Robo advisors that do offer goals based investing allow an investor to choose from a list of goals, followed by questions on time horizon and risk tolerance. Using these inputs, a robo then assesses each goal in terms of a suitable asset allocation to offer an investor a portfolio that will be targeted to meet that specific goal.

To understand how it works, take the example of Betterment goals based approach. Betterment is a leading online investment platform that has really pioneered the goals based approach. It divides an individual’s investment needs into four buckets or goals.

Figure 1: Goals with suggested stock allocation, investment horizon, and withdrawal options (Source: Betterment)

Figure 1: Goals with suggested stock allocation, investment horizon, and withdrawal options (Source: Betterment)

  1. Retirement is where you can start planning for your retirement income either through a Roth or traditional IRA. Betterment allows its clients to invest in this account with a more aggressive stock allocation in the early phase of life and allocation risk adjusted downwards as the retirement age nears. The calculation takes into account factors such as the monthly desired retirement income and life expectancy to make recommendations on how much an individual needs to invest on a monthly basis to meet the retirement income goals.
  2. General investing is for people who want to grow their wealth over time by investing. Such a goal uses a long term horizon and utilizes an aggressive stock allocation of around 90%. Betterment adjusts the stock allocation at 55% at a later date. Such an investment account could be used for growing wealth over the span of decades that could eventually be passed on in inheritance or used to create a trust.
  3. Safety Net is that category of investment goals that serves an emergency fund’s purpose. Betterment has a fixed 40% stock allocation for this goal which is conservative, given the funds in this category need to be liquid in case a withdrawal needs to be made urgently.
  4. Major Purchase (House, Education, other) can be used for short to medium term horizon goals. Say you want to save up for down payment on a house. As you would need to liquidate this fund at a future intended date, the funds are invested conservatively with annual risk adjustments followed by monthly adjustments in the final year of the goal.

By subdividing investment funds into a few categories, each catering its own distinct purpose, Betterment has made it easy for an individual to be in complete control of his future financial obligations.

In order to demonstrate how asset allocation for a goal would look like, let’s examine another robo’s, TradeKing Advisor’s, goals based allocation. For an investor preparing to retire in 20 years, with a moderate risk tolerance and a long term horizon, TradeKing Advisors offers the following allocation mix.

Figure 2: Asset Allocation for a Moderate Risk investor saving for retirement (Source: RoboAdvisorPros)

Figure 2: Asset Allocation for a Moderate Risk investor saving for retirement (Source: RoboAdvisorPros)

It defines a Moderate Growth Portfolio as one with moderate risk and 60/40 stocks and bonds mix. The portfolio also includes 1% in cash and Real Estate and provides an overall balanced domestic and foreign market exposure.  As the risk level increases, stock allocation consequently increases and vice versa. Liquidity and tax considerations are also important concerns when using goals based approach, as they both directly impact asset allocation decisions.

It has become increasingly easy to identify important financial decisions with the help of such web-based investment advisors like Betterment and TradeKing Advisors. The end goal in the investing game should be matching your financial obligations – if you beat index returns along the way, even better!

7 reasons why to invest in robo-advisor

Looking to Invest with a Robo-Advisor? 7 Reasons to Take the Leap

Automated online investment platforms are a thing of the future. There are financial planners out there who are complimenting their financial planning prowess with such online investment tools to bring greater inefficiencies to their customers. Robo-advisors have made investing easy – even for those who do not have a big investing budget to start with. Besides making it easy to invest, robo-advisors provide many other investment benefits as well, some of which are discussed below.

1. Diversification

Robo advisors pride themselves in the ability to provide maximum diversification benefits at a low cost. Most of them use Modern Portfolio Theory (MPT) as the foundation for their investment solutions, as MPT is at the core of modern portfolio management. What MPT has helped popularized is the idea of diversification and doing away of excess risk inherent in correlated securities/assets. As a result, robo-advisors passively manage portfolios comprised of index ETFs and help an individual invest across a number of asset classes. This allows an investor to optimize their portfolios with the professional help of a robo advisor without paying fees so high that would impact long term returns.

2. Tax loss harvesting

It is the selling of securities (ETF in the case of robo advisors) to harvest a loss that could be used to offset capital gains on other securities or income. The proceeds from the sale are then used to buy a similar security or ETF that has risk/reward characteristics close enough to the one sold so that investor portfolio allocation stays the same. As online investment platforms operate 24/7, they are able to significantly lower the costs associated with tax loss harvesting, that would otherwise be expensive for a traditional advisor to perform. This is a great feature offered by robo advisors to enhance returns further without assuming more risk.

3. Goals based allocation

Traditionally, investment management revolved around beating a benchmark, focusing more on how a particular advisor performed in a period and less on a client’s investment goals. Robo advisors, on the other hand, have steered that focus back on the client by offering Goals Based Investing, an investment methodology that aims to help an individual achieve his investment objectives. After all, why does anyone invest at all – to meet some financial obligation or goal in the future, right? So the focal point of investment management should also be aligned with client goals.  Robo advisors, such as Betterment, allow you to invest with goals based allocation. By going with this approach, you are forced to plan and save ahead and less likely to incur debt to fulfill a major financial goal as you will have your future liabilities better matched with your assets.

4. Continual education

Robo advisors are there to serve investors from all age groups and investment levels. Therefore, they have created their platforms informative enough for everyone to benefit. They know their typical client likes to take things in his own hands for the most part, so they offer a variety of educational resources, such as

  • Articles on investment strategies and investment specific goals
  • Investment commentary and insights
  • Free courses (not all of them)

5. Automated monthly withdrawals from your account

For people who look for a complete hands-off approach to investing, robo advisors allow automated monthly withdrawals into the investment account. Among the various bills and payments you have to worry about, robo advisors take care of the one that matters for your financial security the most.

6. Factor tilts

Each robo advisor has a different view on how the markets will perform over a given period. Based on that view, each robo offers certain asset classes and sub asset classes for investor portfolios. For example, Betterment differentiates between value and growth stocks and in effect, puts more weight on value stocks due to their above average historical performance in both domestic and foreign markets. An investor, therefore, investing with Betterment can expect a portfolio tilt towards value more than growth.

7. Fractional shares

There are some online investment platforms that offer fractional shares investing. It is a highly effective investing method as it saves your portfolio from cash drag. Every penny of your investment budget gets invested to form an optimal portfolio with an asset allocation based on your unique risk appetite and investment objectives. When you invest, you don’t want any part of your money sitting on the sidelines waiting to get invested as it leads to subpar returns.

There is a growing abundance of robo advisors, which makes the decision of choosing the one that is best for your investment goals and needs a bit challenging. Educating oneself about the possible online investment platforms is the first step. Before choosing a robo advisor, it is worth your time to do your research to pick the one that is best suited to your unique investment needs and goals because you likely don’t want any regrets on your investment journey.

mutual funds vs robo-advisor which is better

Mutual Funds Or Robo-advisor Portfolio; Which One Really Delivers?

Knowing your priorities in life is crucial, especially when it comes to investment goals. Often asking the “how” and “when” of the investment equation helps you get started on the right path. Many come across mutual funds as one way to start investing in a highly diversified manner with a skilled money manager serving as a cherry on top for their financial knowledge. However, a mutual fund manager charges you hefty fees for their service. Moreover, a typical mutual fund manager wears different hats, which means their time is spent doing things that have little to do with investing as they go out and network to market their funds and make presentations to sell their funds in order to attract more clients to invest with them. The point is simple: you pay a mutual fund manager for doing stuff that does not completely align with your own investment interests. Plus there is an abundance of studies that show that the so-called “skilled mutual fund managers” are no better at beating the market than a monkey picking stocks at random (don’t believe me, go to FT.com for the full story)! So why not put some of that money spent on mutual fund’s fees back into your pocket? By going with a robo-advisor and staying passive in your investment style, you tend to do much better than by investing with a mutual fund.

Most mutual funds strive to beat the market by using an active strategy. There are many variants of this strategy and depending on the fund manager’s particular investment view, this could involve being bullish on a few undervalued stocks, shorting stocks, employing options strategy to hedge downward risks of a portfolio or a combination of all. Whatever form the active strategy may take, it comes with high transaction costs, which lowers net returns for the investor. NY Times reported on a study that S&P Dow Jones Indices conducted focusing on the period between March 2009 (start of the bull market) to March 2014. The study aimed to identify mutual funds that had the best returns over each successive 12 month period starting from March 2009. There were a total of 2,862 actively managed domestic stock mutual funds included in the study, and only two funds were able to stay in the top quarter consistently for 5 years. Statistically speaking, it’s quite negligible! If managers compete on skill, then you can bet each one of them is almost equally skilled. Thus, over-performance in investments then becomes a question of luck rather skill.

If luck is what it comes down to, one would rather try luck by investing with a robo-advisor. The lower you pay in fees, the better your chances of achieving above average returns over the long run are. A mutual fund has many layers of fees. A few fee categories are as follows:

  1. Expense ratio related to the marketing, distribution, and ongoing management costs of the fund. Typically is around 0.90% per year according to Morningstar
  2. Transaction costs are very challenging to quantify accurately as there are multiple facets to it but can generally be estimated around 1.44% (on top of a mutual fund expense ratio)
  3. Cash drag is the cost associated with cash not being invested. If stocks perform poorly, cash drag tends to go up. Conversely, if stocks perform well, this cost tends to go down. Mutual funds need to have some of the invested capital available for liquidity and redemptions. Consequently, a portion of an investor’s capital is kept in cash. It hurts the buy-and-hold investors the most as they subsidize other investor’s liquidity concerns without redeeming their shares in a mutual fund themselves. Robo advisors don’t have such issues as they are meant to cater each individual’s investment needs. According to a Forbes article, cash drag is approximately 0.83% per year for large cap stock mutual funds invested over a 10 year horizon.
  4. Tax costs can be significant if you invest in a taxable account. A mutual fund investor has to pay capital gains taxes on stock holdings that the fund owns, even if the investor did not benefit from the appreciation in stock price at the time he bought into the fund. This is referred to as “embedded gains” in a mutual fund and can range from 1% to 1.2% per year (Forbes). With a robo advisor, you are responsible to pay taxes on only your individual capital gains.

The discussion above entails but a few costs one may encounter with a mutual fund. There are many hidden costs that can reduce your net return. Since beating the market is almost like a fallacy in today’s age of passive index ETFs, an investor needs to be cost conscious at all times and use technology to achieve optimal portfolios.

Wealth management sure is being shaped by the robos!

The Portfolio For Real Buy & Hold Returns

The Portfolio For Real Buy & Hold Returns

If you’re going to buy and hold, why not BUY AND HOLD ON.  Buy and hold strategies typically come with a very large draw downs and a very low risk/reward ratio that results in a Sharpe ratio of about .45 all for an 8% return over the long term.  My thought is, if you’re going to buy and hold, and you’re truly in it for the long term, wouldn’t it be nice to get a better return?

Of course the answer is Yes!

Take a look at this portfolio.  50% SP500 and 50% Long term treasuries with an annual rebalance.  This simply portfolio has done quite well. Actually amazingly well.  Since 1988, the furthest back we can easily go with monthly data the return is a nice 10.06% per year with a drawdown of 20.46% and a Sharpe ratio above 0.8.  That’s pretty exciting.

Total returns of a 50/50 SP 500 and Long Term treasuries strategy since 1972

Total returns of a 50/50 SP 500 and Long Term treasuries strategy since 1972

When I was talking about a better return though I was talking about 2% better.  I’m going for a little more.  With leveraged ETFs that can be achieved.  We have ETFs that give both 2x and 3x the leverage of these asset classes.  That means you get 2x or 3x times the return of the portfolio above with also the same 2 or 3x drawdown and volatility, but for a long term buy and hold; it shouldn’t matter.  Not to mention 2x or 3x the volatility and draw down of this allocation isn’t much more than that of a global allocation non leverage (historically).  It is important to note that they are daily rebalancing ETFs so they are not exactly 2x or 3x over the long term but they are pretty close.

For the remainder of this post we will be assessing this allocation with 3x leverage via the ETFs SPXL and TMF.

With the inception of these two funds being 2009 (earlier for SPXl) there isn’t an extremely long history, but it is enough to assess whether these fund properly deliver the 3x exposure.  Check out the returns of the non-leveraged portfolio and the 3x portfolio since April 16th 2009.

Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009

Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009

Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009 with 3x leverage funds SPXL and TMF

Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009 with 3x leverage funds SPXL and TMF









You can see from the statistics that the 3x portfolio does deliver with about 3x times the return, volatility and drawn down.  In the SPXL & TMF chart you are correctly seeing that $10,000 invested would become $88,410 with an astounding 35% growth rate.   Some might point out that since 2009 we have been in a great bull run and this is just the result of such and Iin a volatile market, leverage decay will eat a way.  That is partially true.  I don’t believe for at all that 35% returns will continue but rather will revert to  slightly under 3x the long term returns of the non leveraged portfolio.  However leverage decay is another story. Let’s see how this leverage decay would’ve worked in turbulence.  Things got turbulentin 2015 and started showing positive trend in April 2016.  How’d they do in this period?

SPY & TLT funds rebalanced from 01/01/2015 - 03/31/2016.

SPY & TLT funds rebalanced from 01/01/2015 – 03/31/2016.

SPXL & TMF funds rebalanced from 01/01/2015 - 03/31/2016. 3x leverage get skiddish during such a volatile time

SPXL & TMF funds rebalanced from 01/01/2015 – 03/31/2016. 3x leverage get skiddish during such a volatile time









Things did get dicey.  While volatility and drawdown was 3x, the return was actually lower with the leveraged funds.  However, shit didn’t hit the fan as many of the naysayers of leverage predict.  In fact if you could’ve held on (this is and hold after all) another 4 months until now, the 3x strategy would be on its way to returning its historic 3x returns.

SPXL and TMF funds rebalanced from 01/01/2015 - 07/22/2016. (Notice returning to normal returns)

SPXL and TMF funds rebalanced from 01/01/2015 – 07/22/2016. (Notice returning to normal returns)

SPY and TLT funds rebalanced from 01/01/2015 - 07/22/2016.

SPY and TLT funds rebalanced from 01/01/2015 – 07/22/2016.









After reviewing the charts for the lifespan of these funds, we can indeed expect (close to) the 3x leverage returns of a non-leveraged SP 500/ Long Term treasury portfolio.  For a true buy and hold disciple, this a dream portfolio.

I plan to do many more updates on the research into this portfolio strategy.

Coming updates:

  • Why it works: low correlation, long term appreciation, it is simple
  • Possibly timing to avoid high volatility with the cape ratio
  • Tax Efficiency
  • Synthetic strategy test with daily 3x leveraging
  • Arguments that this strategy will not continue: ( levered ETFs aren’t as bad as you hear )
    • how do we know it is going to continue
    • -only allocated to US: bogle is only allocated to US
    • -sudden drops
    • -decay: it doesn’t KILL you
    • -Interest rates: the 70s