r/investing • u/PM_ME_STOCK_DDS • Jul 23 '21
How sound is investing in a bogles-style portfolio, but with 3x leverage?
I was particularly intrigued by this post: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=272007
tl;dr: 55%/45% on UPRO (3x SPY) / TMF (3x long term treasury index)
I'm not delusional and don't think this is simply "free money". I know that backtesting doesn't guarantee future returns, etc., etc. I especially don't want to do this now because I think the risk of a massive drawdown of the size that would wipe out this fund (~33.4%) is high. But after the "inevitable" crash this seems like a fine way to do things for a small (~10, maybe ~15% tops) of your overall portfolio.
Thoughts?
11
u/tachyonvelocity Jul 23 '21
The strategy relies on a few assumptions:
- During a stock crash, bonds will have high negative correlations to stocks so the leverage from TMF will negate any losses from UPRO, even if UPRO is completely liquidated.
- A bond "crash" from hyperinflation is no longer possible because modern monetary policy will react to inflationary pressures or that inflationary pressures will continue to be present.
- UPRO due to compounding and daily reset will go up even more than its leverage.
- Rebalancing often will force you to take profits from UPRO and shift it to a relatively stable bond ETF.
The potential risks will come from the following scenarios, which mainly comes from the above assumptions no longer being true:
- Bonds historically, pre-financial crisis, actually did not have such a high negative correlation to stocks so when there is a positive correlation, you would actually see much higher volatility.
- A shift from low inflation to very high inflation, or a change in the demand for US bonds, can cause both stocks and bonds to fall, resulting in potentially a complete loss of the portfolio.
- High daily volatility of either UPRO or TMF will cause a downward drift in daily leveraged ETFs, resulting in lower and lower values for a long period.
- Rebalancing when the negative correlation isn't there can force you to sell at a loss, and overall lack of knowledge of when to rebalance can lead to higher risks.
4
u/G1G1G1G1G1G1G Jul 23 '21
Better imo is buying leap options on something like upro. The reason being to limit your downside. You basically buy the leap option and cash in when you hit a target (for me 30%). This way you know the max loss is only the option price but the upside is infinite and cashing in that 30% only tax about 5% gain in the s&p - over 2 or years- very very likely.
11
u/babyoda_i_am Jul 23 '21
"But after the "inevitable" crash"
Can I borrow your crystal ball.
your entire premise is based on this one sentence.
3
u/Kaawumba Jul 23 '21
He didn't say when the crash will be. A cursory glance at long term charts shows that crashes are common, and should be expected again, eventually.
-12
u/PM_ME_STOCK_DDS Jul 23 '21
Did you even read what was in the link?? In the backtest it was market-agnostic. I choose to not execute it yet, adding another layer on top of this strat that will hopefully increase returns even more, but in no way does that mean the entire premise is based on this one sentence lol. I even put inevitable in quotes to make it clear I'm speculating and not saying it's a done deal.
That having been said - can I borrow the stick up your ass?
6
u/throwaway579534422 Jul 23 '21
Most people here already know about Hedgefundie's excellent adventure, so you're not adding much to the conversation.
But when you say "But after the "inevitable" crash" it just makes you sound like you just started investing.
-7
u/PM_ME_STOCK_DDS Jul 23 '21
Most people here already know about Hedgefundie's excellent adventure, so you're not adding much to the conversation.
How was I supposed to know though? I read through the wiki and it's not there. And if everybody already knows about this, why didn't that guy just give their thought on the strategy?
But when you say "But after the "inevitable" crash" it just makes you sound like you just started investing.
And what about the couple of sentences before that where I say I know the limits of what something like this is? Even if I were new, is that really the attitude you should approach newcomers with?
8
u/throwaway579534422 Jul 23 '21 edited Jul 23 '21
There is a massive post from yesterday with 250 comments discussing it for starters.
It's literally the 6th post from the top.
If you want my real opinion, if you don't know anything you should read more and type less.
-6
u/PM_ME_STOCK_DDS Jul 23 '21
That was literally NOT about a 55/45 portfolio and purely just the ETF.
How do you think I came across this strat in the first place? There was one comment about it and not too much discussion, like ~20 comments or so (and not all of them are helpful).
And how is posting something like this to ask for shit not an attempt to "read more and type less"? Your attempts at being snarky are so hilariously misguided lmaoooo
6
2
u/cheesenuggets2003 Jul 23 '21
My thought is that either all of these posts in r/investing about three times leverage are professional money managers figuring out how to take the other side of the trade, or people posting for Reddit karma.
2
u/DarthTrader357 Jul 23 '21
The best way to post for karma is to congratulate people on their posts in r/Minecraft
1
u/Informal_Tie Jul 23 '21
I think assuming average historical returns and average historical risks in this current market is very brave. Fundamentals and discount rates suggest US market forward 10 years performance would be weak, which skews the equation towards high risk.
I wouldn't do something like this unless you're willing to diversify most of the leveraged portfolio to non-US markets, where fundamentals look more reasonable.
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