EmaxisSlim Cultist-->
You might be right. To be honest, I'm not smart enough to fully understand the plays you and RMD are discussing here though. I've read it over a few times, and parts could be in Bengali for all I know. I'm sticking to less complex, less mentally-taxing plays for my gambling budget now, which means individual stocks and crypto.
adamu -->
You're right, it is only money. And that's exactly how I approached it. It's better to make that mistake at 40 than at 60. And I regrouped and I've already made back the money and more (the bull market has helped of course).
Anybody investing in leveraged ETFs?
Re: Anybody investing in leveraged ETFs?
From the original Hedgefundie post
QUOTE
What is the theory behind this strategy?
There are three theoretical principles behind the strategy.
First, diversification. When one part of a well-diversified portfolio does poorly, the other parts do not necessarily drop in kind. Over the long run, long term Treasuries and the S&P 500 have had a correlation of approximately 0. (Shorter term Treasuries have been slightly more correlated with the stock market.)
Second, risk parity. Once we have decided upon the assets to hold, the next question is in what proportion we hold them. If the two assets differ significantly in volatility, you’ll want to balance them so that the more volatile asset does not drive the volatility of the portfolio as a whole. Over the long run, the average annual volatility of long term Treasuries has been 10%; unsurprisingly, the S&P 500 has been more volatile, at 15%. Therefore, a risk parity portfolio would hold more Treasuries than stocks. Simple arithmetic shows parity is achieved at 40/60.
Obviously, the problem with a 40/60 portfolio is that it delivers relatively conservative returns. The solution is leverage. So far our work has been to take risk out of the portfolio; with this last step we are putting risk back in. The upshot, though, is that our diversified, balanced portfolio delivers more return per unit of risk (i.e. has a higher Sharpe ratio) than the S&P 500 alone. So once we increase the risk of the portfolio (through leverage) to equal the risk of the S&P 500, we end up with far more return than the S&P 500. Which is exactly what the historical evidence shows.
UNQUOTE
Initially it was thought that 40/60 portfolio would give the best risk parity but later on after much backtesting and experimenting it was settled at 55/45.
I liked this reasoning hence taking my chance. No way I am recommending others to copy this strategy. The reason of starting this post was just to hear the opinions of others and get some ideas from those who are already in this strategy.
QUOTE
What is the theory behind this strategy?
There are three theoretical principles behind the strategy.
First, diversification. When one part of a well-diversified portfolio does poorly, the other parts do not necessarily drop in kind. Over the long run, long term Treasuries and the S&P 500 have had a correlation of approximately 0. (Shorter term Treasuries have been slightly more correlated with the stock market.)
Second, risk parity. Once we have decided upon the assets to hold, the next question is in what proportion we hold them. If the two assets differ significantly in volatility, you’ll want to balance them so that the more volatile asset does not drive the volatility of the portfolio as a whole. Over the long run, the average annual volatility of long term Treasuries has been 10%; unsurprisingly, the S&P 500 has been more volatile, at 15%. Therefore, a risk parity portfolio would hold more Treasuries than stocks. Simple arithmetic shows parity is achieved at 40/60.
Obviously, the problem with a 40/60 portfolio is that it delivers relatively conservative returns. The solution is leverage. So far our work has been to take risk out of the portfolio; with this last step we are putting risk back in. The upshot, though, is that our diversified, balanced portfolio delivers more return per unit of risk (i.e. has a higher Sharpe ratio) than the S&P 500 alone. So once we increase the risk of the portfolio (through leverage) to equal the risk of the S&P 500, we end up with far more return than the S&P 500. Which is exactly what the historical evidence shows.
UNQUOTE
Initially it was thought that 40/60 portfolio would give the best risk parity but later on after much backtesting and experimenting it was settled at 55/45.
I liked this reasoning hence taking my chance. No way I am recommending others to copy this strategy. The reason of starting this post was just to hear the opinions of others and get some ideas from those who are already in this strategy.
Re: Anybody investing in leveraged ETFs?
Before selecting TQQQ over UPRO or SPXL, I gave it much thought and realised that the correlation between S&P500 and Nasdaq 100 is very strong so won't make much difference if I select one over the other. Further I have majority of my investing portfolio in S&P500, all country funds but zero in Nasdaq and since Nasdaq has been consistently outperforming S&P500 hence I chose TQQQ.EmaxisSlim Cultist wrote: ↑Mon Sep 13, 2021 4:43 am
It all comes down to an appetite for risk in the end.
You have made a more concentrated bet in continued tech-outperformance vs a general US market outperformance. Only time will tell what is the correct play. However, statistically, the S&P500 is a safer bet.
As for the covered calls, I have a strategy in place for that also.
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EmaxisSlim Cultist
- Veteran
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Re: Anybody investing in leveraged ETFs?
15 years of outperformance feels like a lot, but in the grand sense of things, it is not. Forgive me, but you are showing recency bias here.RMA wrote: ↑Mon Sep 13, 2021 5:49 amBefore selecting TQQQ over UPRO or SPXL, I gave it much thought and realised that the correlation between S&P500 and Nasdaq 100 is very strong so won't make much difference if I select one over the other. Further I have majority of my investing portfolio in S&P500, all country funds but zero in Nasdaq and since Nasdaq has been consistently outperforming S&P500 hence I chose TQQQ.EmaxisSlim Cultist wrote: ↑Mon Sep 13, 2021 4:43 am
It all comes down to an appetite for risk in the end.
You have made a more concentrated bet in continued tech-outperformance vs a general US market outperformance. Only time will tell what is the correct play. However, statistically, the S&P500 is a safer bet.
As for the covered calls, I have a strategy in place for that also.
QQQ is only 20 years old the S&P500 is over 60.
A concentrated and extended sector downturn, such as the internet bubble, presents some real danger.
It is just the riskier end of a risky bet.
If the US markets are in an extended tech downturn, and your covered calls get assigned this position might not survive. While you could ride it out with Upro/TMF fine.
Food for thought.