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.
Congrats on your milestone! I saw you have been using LETF for maintaining leverage, despite the ~1% expense ratio and some borrowing costs. Many others would prefer rolling index futures due to lower implied borrowing cost. I wonder what's your thoughts on this. Thanks!
ReplyDeleteI think it's more of a lifestyle choice for me. A busy life is a wasted life. I don't want to pay too much attention to small fluctuation of the market. I'm willing to pay someone ~1% to maintain daily leverage so that my daily life doesn't have to be occupied by rolling futures, negotiating swaps, or worrying about margin calls. If you're too deep in the woods, you only see the local optimal instead of global optimal.
ReplyDeleteFair enough. Really enjoyed your writings!
ReplyDelete一口气从09年的帖子看到了21年的这篇帖子，真是醍醐灌顶。对于马上大学毕业的我，去年由于胡乱操作亏了不少钱，看完这篇文章感觉受到很多启发。我也是留学在北美的马上毕业就要进入工作了，看了你的人生经历很有感慨，真是世事无常，有机会希望可以做笔友交流
ReplyDelete有考慮過使用2X的ETF嗎?跟3X比起來，耗損較小，夏普值較高
ReplyDelete另外如果判斷FED停止升息，現金直接拿來加碼股票應該更好?債券畢竟只是避險的工具，要增加曝險，一樣的資金不如直接加碼股票?
Yes, you can use either 2X or 3X ETF to build your portfolio if your targeted leverage ratio is less than 2X. It doesn't make too much difference if market fluctuation is small (<20%). I decide to use 3X rather than 2X so that I can keep a larger cash/bond position. In case of one-in-a-decade event, my equity will have a large markdown, but it's also the time when I can deploy my cash more effectively. For example, Right now (Apr 30, 2022), I have a large cash position and wish market go down further before increasing my equity position.
Delete經過2018及2022年的股債雙殺，看得出在升息階段，TMF似乎無法達到資產配置的效果，如果未來市場下跌或停止升息，你會優先選擇增加3X股權還是債權的頭寸?
Delete另外底部時機是很難判斷的，2020年的V型反轉已經證明這點，你在2020年似乎有躲過股災，後來有來得及在股市反轉前加碼股權頭寸嗎?
Long time fan here. What's your move now as of Jun 2022? Did you start increasing your leverage or percentage of equity? When you do, will you write a post?
ReplyDeleteNo, I haven't increased leverage yet (Sept 2022) most of my cash in short term Treasury (6m~1.5yr).
DeleteSince you have an 8 figure balance, why bother with leverage anymore? Seems like less stressful would be a traditional index fund / short term bond portfolio, with perhaps only 30-50% stocks or even a TIPS ladder since you only need to preserve wealth. I've enjoyed reading your posts on bogleheads, surprised there isn't more interest on there. Also are you still using TMF as a hedge or only cash? I'm trying leverage with a small amount of money (not gutsy enough to go all in) and would be happy with an extra $500k - 1 million that I'd then shift back to in to traditional index investing, wouldn't keep risking it to get to 8 figures.
ReplyDeleteI have the same feeling. It really takes great courage or even faith to hold such a large leveraged position, as the daily movement might become very very big, such as in millions. I'm not sure whether the author has changed strategy in the past year, if not, even a 1.5x leveraged portfolio will turn into a giant drawdown.
DeleteI think we have different mindsets. Here is the view from my perspective.
DeleteSince last December, my portfolio's roughly divided into half and half. half is 3X UPRO, and the other is 6m~1.5 yr treasury. (I haven't yet increased my leverage on bond portfolio - please see the above when I plan to change it).
To replace my earned income before retirement, I need ~2% return from my bond position. As long as the rate stays above 2%, I can keep my current lifestyle and don't have to worry about everyday expense. If the Fed keeps raising rate, it just guarantees some improvement on my living standard. I have no complaint about it .
My equity exposure is > 100% (~0.5x3=150%), but I don't need it for any foreseeable future. As long as the stock market returns positively in a decade, it's likely to outperform the market because of the leverage. So, I don't worry about any short-term fluctuation in the stock market, either.
In fact, the only thing stressing me out this year is to wait for the expected market crash. If the market drops another 15~20%, I will adjust my portfolio. Otherwise, I'm fine to stay with the status quo.
If you need $120k / year from your portfolio, you could buy 3 million of long term treasuries, perhaps as an individual bonds or a bond fund like VGLT that has a 4.4% yield now. That's nominal yield, and the 3 million principal balance could vary but you will have locked in a yearly $120k / year payout for the next 30 years and you have the rest of the 9 million for inflation growth. Since your spend is only 1% of your portfolio it doesn't matter, though, but worth at least thinking about.
DeleteEither that or TIPS that are at a 10 year high so either could be a great buying opportunity if you've already rich to preserve it. I'd say you are rich if you are satisfied with $120k / year spending on a 12 million portfolio, maybe not if you were spending much higher like $600k / year which isn't impossible in a high cost of living.
I know you got some negative comments on bogleheads (but appreciate your posting there) but the thread on long term treasurys is worth a look if you haven't already checked it out.
upro今年最大回檔67%，如果持有50%，代表總資產回檔超過3成，這樣幅度會不會太大?那預計要跌到何時才會開始進場做多?
ReplyDeleteIt depends on your goal. If you shoot for 2x in a decade, 30% drawdown looks terrible. If you aim for 10x, you have to stomach drawdown much bigger than that.
ReplyDeleteAs I said before, I don't plan to go back unless s&p drops another 15~20%. It's not a prediction,but a threshold that triggers my different action. It means that upro has to drop >90%, and presents a 10x opportunity, assuming it takes a decade to recover.
My time horizon is very long, and expected return is very high. Short term volatility doesn't bother me. If we're not on the same page, it might be hard to understand my reasoning.
Thanks OP for all the awesome posts sharing your strategy, I love your strategy and currently preparing for the fed rates cut to go with 3x right now.
ReplyDeleteI have a question about choosing upro vs. tqqq though:
Not sure what is the reason why OP didn't consider tqqq, but if the concern is nasdaq 100 has higher volatility, then we could just reduce the leverage, the same formula (kelly) could be used for tqqq as well to calculate the optimal leverage. Actually I've tested out the 2x nasdaq 100 since 1985, it outperforms 3x sp500. One opposing argument would be 1985 was the beginning of the 40-year long term rate cuts and it'd favor more volatile stocks like Tech since then. I'd appreciate if OP can share some thoughts on this.
I had a mix of upro and tqqq since their inception. Tqqq has outgrown upro by a lot in the past decade. When I decided to de-leverage last December, I sold all tqqq and used upro to construct my equity position because I thought tech was more over-valued. I do plan to increase my tech exposure when the days come for longing the market.
DeleteThanks for sharing. It makes a lot of sense.
DeleteWhat I am meant is actually "riskier" than mixing tqqq with upro, but to replace upro completely with tqqq. I know I am not good at understanding which stocks/sector is overvalued/undervalue, but I know statistically (based on data since 1985) that 2x nasdaq100 outperformed 3x sp500 by a lot. Indeed there are some arguments to say nasdaq100 was just being lucky to catch the trend of the tech/information sector by putting disproportionately heavy weights on the tech stocks and exclude financial sector entirely. But it still lacks evidence why this makes nasdaq100 inferior. All I am saying is that if the spirit on the strategy is to exploit the optimal leverage, why should we care about the fundamentals?
Btw I am curious to know how much leverage did OP use after 2008 stock crash happened, asking because I feel a large portion of the success of this strategy (or most other strategies i guess) is to leverage as much as possible when the once-in-lifetime comes, we would certainly take on more risks in such scenarios but it's just too expensive to miss. In such situations I would say even 5x is sensible.
Re: fundamentals or not?
DeleteIndustries wax and wane over time. If we have infinite time horizon, leverage matters more than anything else. But, individual investors have only limited time horizon (40-50yrs).It helps if they're aware of the paradigm shift in which they're living through.
I bet (more accurately overweight) only two things in the past 20-30 yrs, tech and china. I think china was pretty much over 4-5 yrs ago. What's left is a managed slow down or decline.
Tech's story is not that clear. The big five will be more mature, slow down, or eventually get disrupted, but new disruptors are likely to join qqq.I decided to stay away from qqq this year and perhaps most of next year, but for longer term, I think it will probably outperform spy. The wildcard is some disruptors may not be in qqq at all.
Re: 2008 leverage.
I secured a line of credit before 2008 crash. When the crash happened, I took it out to buy stock, and then upro/tqqq. My home equity was deep in negative for a couple of years.
when looking back, everything is 20-20. The hard part is how to increase leverage during a worldwide financial crisis, 1) Am I emotionally prepared for it? Things could become worse before getting better. After a few rounds of layoff, most people start to worry about their paycheck rather than returns. 2), do I have the means to increase the leverage? All liquidity will dry up suddenly. No one will lend, and margin becomes prohibitively high. So you have to prepare before it actually happens.
Thanks for the thoughts on fundamentals, I think it doesn't hurt to optimize along that direction as long as maintaining the correct level of leverage and betting something one is confident at.
DeleteGreat call outs on the ability to leverage more in extreme situations. For myself I lean toward LEAP + LETF to achieve more than 3x because 1) it's non-callable instrument as margin 2) it doesn't require hard interest payment every month as HELOC (especially when one worries about layoffs). Not sure what would be the Cons though.
? re bet on China and Tech. Obviously you bet successfully on tech with TQQQ, but how did you bet on China? Are you just speaking of China's role in helping tech companies be successful, like Apple's sales and production of iphones in China? China's stock market didn't do very well for foreign investors this last decade.
DeleteI invested RE in Beijing. Most non-chinese retailer investors won't be able to do that. I exited 5 yrs ago and won't touch Chinese property market in any foreseeable future.
DeleteI didn't and won't touch Chinese stock, foreign and domestic, with a thousand feet pole.
do you need to rebalance with UPRO position?
ReplyDelete