When I started this blog over a decade ago, may goal is to save enough to retire in 20~30 yrs. I tried to read books on investment theories and to talk to some experts/professionals.
What's taught in school confuses me. If professors have any faith on what they're teaching, why don't they put their own money in practice? Most of professionals fare no better, either. What actually makes them money is the fact that they're betting and leveraging someone else's money, they can earn their 2/20 fees, fully participating in the upside but don't have to bare the full blunt of the downside.
I decided to ignore most theories and use a simple framework to beat the market. Assuming the long term return of market tracks the historical average of S&P, the leverage should help my portfolio to outperform the index. For most of time, I only need to watch for the unexpected, once-in-a-decade market crashes. With some luck, I was able to to take advantage the past two crashes: 2008/9 financial crisis and coronavirus crash. The subsequent rebound and bull market carried me across the finish line at 36~37% ARR over 13 yrs.
In the past few months, I lowered my leverage ratio from 3x to 1.5x* to prepare for early retirement. I plan to spend 1~1.5% of my asset annually. This budget ensures that I can sustain <22% market corrections(1.5%->1% = ~33% = 1.5 x 22%) and still maintain my current lifestyle. If the ARR of S&P for the next 30~40 yrs is >2%, my budget (nominal) for living expense should grow a bit faster than the index.
I decide to withdraw 1~1.5% rather than the usual 4% because I want some safety margin. I hope I can spot the next major crash (>22%) before it happens. In case I fail completely, I want a large cushion allowing me not only to live through a prolonged recession but also to participate in the rebound by re-leveraging my portfolio**.
Therefore, my strategy remains unchanged: maintain a constant (>1) leverage ratio, cross my finger, and wait for spectacular crashes. The difference between my pre- and post-retirement period is just leverage ratio and margin of safety.
I'm trying to start a new chapter of my life, hopefully spending my time and energy on something other than making money.
* 1.5x is currently implemented by holding 50% 3x UPRO/TQQQ and 50% cash. The cash position is intended to limit the max drawdown to 50% in case I fail to anticipate a major crash, e.g. UPRO/TQQQ suffer 99% loss. I plan to migrate 50% cash to 50% bond in the coming years. The pace of the migration will follow the pace of Fed's rate hikes. My target is to reach 50% TMF when Fed slows down or pauses rate hikes.
** If I can foresee a major crash is imminent like coronavirus crash, I may proactively de-leverage and even short the market. Otherwise, I just do nothing and wait for the next major crash. I will rebalance (re-leverage) after the crash. The timing of re-leverage depends on the timing of Fed's action. When Fed is all-in, I'm all-in. The re-leverage ratio depends on the scale of market drawdown. If the drawdown reaches epic scale, like great depression or dot.com bust, I'm prepared to go beyond 3x using futures.
