HEDGEFUNDIE's excellent adventure Part II: The next journey

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Kbg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Kbg »

NQU1 = Nasdaq 100 futures contract(s) expiring in September
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

OohLaLa wrote: Sat Jul 31, 2021 2:35 pm
Disclaimer: I am not a lawyer. :mrgreen:

In the case of bankruptcy of a fund manager, ETF assets are not accessible to creditors. The assets are held in your name and will not be seized.

You start going down the rabbit hole a bit when you deal with ETFs using derivatives. Let's take a look at TQQQ:
NASDAQ 100 INDEX SWAP GOLDMAN SACHS INTERNATIONAL
NASDAQ 100 INDEX SWAP SOCIETE GENERALE
NASDAQ 100 INDEX SWAP BANK OF AMERICA NA
NASDAQ 100 INDEX SWAP BNP PARIBAS
NASDAQ 100 INDEX SWAP CITIBANK NA
NASDAQ 100 INDEX SWAP JP MORGAN SECURITIES
NASDAQ 100 INDEX SWAP MORGAN STANLEY & CO. INTERNATIONAL PLC
NASDAQ 100 09/17/21 (NQU1) <--- not sure what this is, didn't look it up
NASDAQ 100 INDEX SWAP UBS AG
NASDAQ 100 INDEX SWAP CREDIT SUISSE INTERNATIONAL

These are all the equity swaps in place to gain leverage. You shouldn't worry about Proshares folding, but the investment banks associated with those swaps. I'm wondering if one of these banks folding will have any long-term impact on TQQQ.

I can see, short-term, TQQQ losing leverage associated with that swap in particular and having to write up a contract with someone else to gain back that exposure. I can also see a planned cash flow to Proshares, in case of QQQ going up, being defaulted on, but I don't know the regularity of the payments (I don't know the terms of the contract). The shorter the span between each payment, the lesser the risk to Proshares and investors (ex: if it's daily, you lose out on one day's worth of payment. If it's disbursed every week, you lose a week's worth.)

If you take a look at the list, you see they are very diversified in the counter-parties. It would take more than one default to cause catastrophic consequences.

Finally, TQQQ is not all swaps. You have direct exposure to the underlying stocks, in part.
Don't quote me on this but I believe the swaps are paid daily. I do recall reading that somewhere.
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coingaroo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by coingaroo »

OohLaLa wrote: Sat Jul 31, 2021 2:35 pm
tomphilly wrote: Sat Jul 31, 2021 12:14 pm
TheDoctor91 wrote: Sat Jul 31, 2021 3:53 am Is there anything within the LETFs or any reason that Direxion or ProShares that could cause those institutions to fail? Is there anything within the swap agreements with a LETF that exposes Proshares or Direxion? Is there anything that could cause the institution holding the swap to fail?
Good question. I've never really thought about this as a risk - has an ETF ever folded, with shares and investments vanishing? As I understand it ProShares ETFs (UPRO) are not FIDC insured.

I guess you could mitigate some of this risk by combining UPRO and SPXL (ProShares & Direxion), e.g UPRO/SPXL/TMF 30/30/40. There is no competing product to Direxion TMF though (ProShares UBT is only 2x leveraged).
Disclaimer: I am not a lawyer. :mrgreen:

In the case of bankruptcy of a fund manager, ETF assets are not accessible to creditors. The assets are held in your name and will not be seized.

You start going down the rabbit hole a bit when you deal with ETFs using derivatives. Let's take a look at TQQQ:
NASDAQ 100 INDEX SWAP GOLDMAN SACHS INTERNATIONAL
NASDAQ 100 INDEX SWAP SOCIETE GENERALE
NASDAQ 100 INDEX SWAP BANK OF AMERICA NA
NASDAQ 100 INDEX SWAP BNP PARIBAS
NASDAQ 100 INDEX SWAP CITIBANK NA
NASDAQ 100 INDEX SWAP JP MORGAN SECURITIES
NASDAQ 100 INDEX SWAP MORGAN STANLEY & CO. INTERNATIONAL PLC
NASDAQ 100 09/17/21 (NQU1) <--- not sure what this is, didn't look it up
NASDAQ 100 INDEX SWAP UBS AG
NASDAQ 100 INDEX SWAP CREDIT SUISSE INTERNATIONAL

These are all the equity swaps in place to gain leverage. You shouldn't worry about Proshares folding, but the investment banks associated with those swaps. I'm wondering if one of these banks folding will have any long-term impact on TQQQ.

I can see, short-term, TQQQ losing leverage associated with that swap in particular and having to write up a contract with someone else to gain back that exposure. I can also see a planned cash flow to Proshares, in case of QQQ going up, being defaulted on, but I don't know the regularity of the payments (I don't know the terms of the contract). The shorter the span between each payment, the lesser the risk to Proshares and investors (ex: if it's daily, you lose out on one day's worth of payment. If it's disbursed every week, you lose a week's worth.)

If you take a look at the list, you see they are very diversified in the counter-parties. It would take more than one default to cause catastrophic consequences.

Finally, TQQQ is not all swaps. You have direct exposure to the underlying stocks, in part.
My personal view is that the Fed and/or congress will bail out any of the investment banks should they face an issue honoring their daily swaps. This would only be an implication after a complete wipe-out of their shareholders btw and possibly bondholders (?) although not sure on the latter.
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hillclimber
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

The RPAR etf was brought up earlier in the thread, and someone said that it wasn't leveraged. I was poking around the website, and I found that it actually uses 1.2x leverage, so it's like a more conservative NTSX. You can see it on page 4 of its intro document. With that being said, you could probably get similar exposure without paying the 50 basis point expense ratio by using lower cost etfs like NTSX, NTSI, MGLD, and other etfs.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by oldcomputerguy »

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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Miggsy »

investor.was.here wrote: Fri Jul 30, 2021 3:37 pm I'm coming from a balanced fund. How do you think I should migrate over? I know the research says that it's not profitable to DCA into the market over time. That's not unexpected, since the market has a positive expected return. But, I've not seen a study which evaluated the risk-adjusted return of DCA into the market. In this case, I'm already in the market but substantially increasing my beta so it's similar to entering the market from cash. I know I at least need to do it over a few days, mainly because of time lag between mutual fund sale and ETF purchase. Getting better pricing would be a bonus.
I migrated from a Vanguard Total Stock Index fund to the 3x All-weather leveraged portfolio last July and did it in one fell swoop. This was in my Roth IRA, which was about 20% of my retirement savings at the time. I actually viewed going from 100% stocks to this leveraged portfolio as decreasing the risk I was most concerned about, which was equities, and better balancing my portfolio. And that continues to be the case today. I also don't have any data on DCA vs. lump-sum, but have heard the same as you regarding it not being profitable to DCA over the long-run.

Regarding the beta of the portfolio, I went from a beta of 1.0 to 0.7 and a U.S. market correlation from close to 1.0 to closer to 0.5. So I viewed it as reducing risk and better balancing the portfolio. I was content to do it all at once; I also had the knowledge this was only 20% of my portfolio and I still had 80% in total market equities.

I'm not sure what "balanced" allocation you are coming from, but this was my thought process for the transition. I also thought that if I did benefit from DCA it would be due to luck, not any sort of skill.
investor.was.here wrote: Fri Jul 30, 2021 3:37 pm What do we do if we experience a 33% drop in any of these funds? I know it's never happened but we've come close historically. We have circuit breakers added since then (black monday, 1987) so even less likely to occur. Do we just quickly rebalance back into it? I guess it acts as a stop-loss.
Yes, my thought would be to rebalance. If there is a black monday type event and stocks decline, that's why we diversify with the uncorrelated assets. Even if bonds/gold "only" preserve capital and don't rally significantly, they preserve that capital to allow you to rebalance into equities when they are likely to gain significantly.
investor.was.here wrote: Fri Jul 30, 2021 3:37 pm What I've found as well, from backtesting. I think people here hate commodities/gold because they only hold value. There's no long term growth in buying power from them. Did you look at commodity equities? We have the same lack of leverage problem here too.
I didn't look at commodity equities. My thought is equities, regardless of sector, are largely equities when the market goes to hell, and you don't get the diversification benefit I want. I may be wrong and this strategy is unlikely to be perfect. But it's good enough for me.
Fonfo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Fonfo »

Hello there,

I have been reading this thread for the last 3 days. I find it very interesting, Thanks to all contributors. Actually I have a question concerning the etf allocation. I am living in Europe, without an easy access to those UPRO and TMF LETFs.

I found one that it can replace UPRO >> IE00B7Y34M31
But for TMF, I have only found one etf that allocates 3x in 10Y treasury Bonds. >> WisdomTree US Treasuries 10Y 3x Daily (IE00BKT09032).

What would the impact be of replacing TMF by IE00BKT09032 for the portfolio strategy? Maybe 10Y treasure does not react so aggressively against stocks and it would be recommended to increase the portfolio allocation and make it 50/50 (stocks/bonds)?

EDIT: Just found that: https://www.portfoliovisualizer.com/bac ... ion4_2=135

Thanks!
Last edited by Fonfo on Mon Aug 02, 2021 11:37 am, edited 1 time in total.
lolatlogan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by lolatlogan »

How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Hydromod
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Fonfo wrote: Mon Aug 02, 2021 11:12 am Hello there,

I have been reading this thread for the last 3 days. I find it very interesting, Thanks to all contributors. Actually I have a question concerning the etf allocation. I am living in Europe, without an easy access to those UPRO and TMF LETFs.

I found one that it can replace UPRO >> IE00B7Y34M31
But for TMF, I have only found one etf that allocates 3x in 10Y treasury Bonds. >> WisdomTree US Treasuries 10Y 3x Daily (IE00BKT09032).

What would the impact be of replacing TMF by IE00BKT09032 for the portfolio strategy? Maybe 10Y treasure does not react so aggressively against stocks and it would be recommended to increase the portfolio allocation and make it 50/50 (stocks/bonds)?

EDIT: Just found that: https://www.portfoliovisualizer.com/bac ... ion4_2=135

Thanks!
The risk budget for a 55/45 UPRO/TMF portfolio is about 75/25 equity/bond. Replacing UPRO/TMF with UPRO/TYD with the same risk budget gives about 39/61 UPRO/TMF allocation (say 40/60). You can play further with the PV analyzer.
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tomphilly
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Fonfo wrote: Mon Aug 02, 2021 11:12 am Hello there,

I have been reading this thread for the last 3 days. I find it very interesting, Thanks to all contributors. Actually I have a question concerning the etf allocation. I am living in Europe, without an easy access to those UPRO and TMF LETFs.

I found one that it can replace UPRO >> IE00B7Y34M31
But for TMF, I have only found one etf that allocates 3x in 10Y treasury Bonds. >> WisdomTree US Treasuries 10Y 3x Daily (IE00BKT09032).

What would the impact be of replacing TMF by IE00BKT09032 for the portfolio strategy? Maybe 10Y treasure does not react so aggressively against stocks and it would be recommended to increase the portfolio allocation and make it 50/50 (stocks/bonds)?

EDIT: Just found that: https://www.portfoliovisualizer.com/bac ... ion4_2=135

Thanks!
Welcome :) TYD will not give you as potent a hedge in crashes as TMF - when you look at it in PV the max drawdown is higher. If you reduce UPRO to counter this, it will dampen your CAGR, though the Sharpe is improved. PV. Maybe you can access US markets through Interactive Brokers.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Search the first couple pages for the riding the HFEA thread. Things have been going well for people in this strategy.
lolatlogan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by lolatlogan »

rchmx1 wrote: Mon Aug 02, 2021 12:19 pm
lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Search the first couple pages for the riding the HFEA thread. Things have been going well for people in this strategy.
Yeah, I did a quick analysis and relative to VTI took the same hit and has since recovered and made 100% back the initial investment.

Image
jarjarM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Much also depends on the rebalancing timing. In general, for those of us who started in early 2019, March 2020 essentially wipe out a year gain and then some (my $100k investment were down to $90+k) but as long as you hold on and rebalance accordingly, you'll come out way ahead. Several of us posted over at the riding thread and we're all >200% gain on original investment (from early 2019).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by lolatlogan »

jarjarM wrote: Mon Aug 02, 2021 1:40 pm
lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Much also depends on the rebalancing timing. In general, for those of us who started in early 2019, March 2020 essentially wipe out a year gain and then some (my $100k investment were down to $90+k) but as long as you hold on and rebalance accordingly, you'll come out way ahead. Several of us posted over at the riding thread and we're all >200% gain on original investment (from early 2019).
Do you have a link to the other thread? What has been the general rule for reblancing? I was going to mock a forecast and use 5% over under on either end as a threshold to rebalance.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

lolatlogan wrote: Mon Aug 02, 2021 3:07 pm
jarjarM wrote: Mon Aug 02, 2021 1:40 pm
lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Much also depends on the rebalancing timing. In general, for those of us who started in early 2019, March 2020 essentially wipe out a year gain and then some (my $100k investment were down to $90+k) but as long as you hold on and rebalance accordingly, you'll come out way ahead. Several of us posted over at the riding thread and we're all >200% gain on original investment (from early 2019).
Do you have a link to the other thread? What has been the general rule for reblancing? I was going to mock a forecast and use 5% over under on either end as a threshold to rebalance.
Here you go. In terms of the rebalancing, the suggested way is to do quarterly on this thread but there's lots of discussion regarding shorter or longer or volatility targeting, TAA, risk budget and etc. You'll have to pick one that you'll be comfortable with. My is a modified version of TAA. However, so far quarterly rebalancing is probably the easiest and most straightforward and rewarding. No one knows the future so good luck on whichever path you decide on :beer

viewtopic.php?f=10&t=326588
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

lolatlogan wrote: Mon Aug 02, 2021 3:07 pm
jarjarM wrote: Mon Aug 02, 2021 1:40 pm
lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Much also depends on the rebalancing timing. In general, for those of us who started in early 2019, March 2020 essentially wipe out a year gain and then some (my $100k investment were down to $90+k) but as long as you hold on and rebalance accordingly, you'll come out way ahead. Several of us posted over at the riding thread and we're all >200% gain on original investment (from early 2019).
Do you have a link to the other thread? What has been the general rule for reblancing? I was going to mock a forecast and use 5% over under on either end as a threshold to rebalance.
Many use quarterly rebalancing at around the end/beginning of the quarter. You'll get a flurry of posts about then.

Some may use monthly rebalancing at around the end/beginning of the month.

My backtesting suggests that the beginning/end points seem to have done better than the middle points, historically.

Historically rebalancing bands of 15% or so would have worked reasonably well; 5% is too tight with such volatile assets, you'll be rebalancing all the time.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

Hydromod wrote: Mon Aug 02, 2021 3:41 pm
lolatlogan wrote: Mon Aug 02, 2021 3:07 pm
jarjarM wrote: Mon Aug 02, 2021 1:40 pm
lolatlogan wrote: Mon Aug 02, 2021 11:30 am How has your portfolio held up after the market rebounded? I'm considering trying this 55/45 approach.
Much also depends on the rebalancing timing. In general, for those of us who started in early 2019, March 2020 essentially wipe out a year gain and then some (my $100k investment were down to $90+k) but as long as you hold on and rebalance accordingly, you'll come out way ahead. Several of us posted over at the riding thread and we're all >200% gain on original investment (from early 2019).
Do you have a link to the other thread? What has been the general rule for reblancing? I was going to mock a forecast and use 5% over under on either end as a threshold to rebalance.
Many use quarterly rebalancing at around the end/beginning of the quarter. You'll get a flurry of posts about then.

Some may use monthly rebalancing at around the end/beginning of the month.

My backtesting suggests that the beginning/end points seem to have done better than the middle points, historically.

Historically rebalancing bands of 15% or so would have worked reasonably well; 5% is too tight with such volatile assets, you'll be rebalancing all the time.
quarterly seems to give the highest returns. I do bands within my total portfolio (no more than 20% of my equities can be leveraged)
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DRReaders »

I had a question about asset allocation across multiple accounts using this strategy for early retirement. Assuming that I was following the vanilla 55/45 UPRO/TMF strategy and had the entire portfolio in this strategy (I know this is strategy is speculative and one shouldn't do this, but as a thought experiment), it would make sense to allocate TMF to tax-advantaged accounts and UPRO to taxable accounts. However, if I were to retire at 40 for the sake of this example I would need to withdraw from the taxable account for the years up until I'm 59 1/2, selling my UPRO shares which would most likely have larger capital gains than TMF and also throws off my AA. Would the best solution to this be to:

1. Sell UPRO shares in taxable starting with lots with the lowest tax burden when money is needed for expenses and during rebalancing re-buy UPRO shares in tax-advantaged to achieve desired AA

2. Keep some TMF in the taxable account which creates an unnecessary "slice" but allows me to sell TMF/UPRO as desired to achieve the 55/45 AA. This might also have the consequence of creating additional slices in the tax-advantaged accounts.

Or is there some other solution to this issue?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

DRReaders wrote: Mon Aug 02, 2021 6:14 pm
Or is there some other solution to this issue?
Separating UPRO and TMF between accounts that can't transfer between each other is a bad idea. The main reason this works is because when one draws down, you're able to rebalance with the other asset. You usually see it with UPRO but even recently with TMF a few months ago. If the accounts are impermeable, then you won't be able to rebalance and you'll be subject to the full drawdown for each asset.

It's a pain, but the safe bet would be to run 55/45 separately in each account
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

adamhg wrote: Mon Aug 02, 2021 6:35 pm
DRReaders wrote: Mon Aug 02, 2021 6:14 pm
Or is there some other solution to this issue?
Separating UPRO and TMF between accounts that can't transfer between each other is a bad idea. The main reason this works is because when one draws down, you're able to rebalance with the other asset. You usually see it with UPRO but even recently with TMF a few months ago. If the accounts are impermeable, then you won't be able to rebalance and you'll be subject to the full drawdown for each asset.

It's a pain, but the safe bet would be to run 55/45 separately in each account
Not only that, but if DRR is seriously contemplating retiring at 40 and will need to deplete those accounts, they will definitely be negatively impacted by dedicating each account type to one ETF. You want to withdraw funds efficiently, from a taxation PoV. You guys and gals in the US pay 10% fines on early withdrawal of earnings and/ or contributions, if I understand correctly.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DRReaders »

Yup, withdrawing from our tax-advantaged and tax-deferred accounts in the US before 59 1/2 will incur a 10% penalty on top of taxes with a few exceptions like contributions to a Roth IRA.

Someone who retires at 50 would still have to withdraw 10 years worth of expenses from their taxable account barring the few exceptions. I guess the best way to divide up the accounts if early retirement is the goal would be to split it 55/45 or at least keep some TMF in the taxable account if this strategy is used for the whole portfolio.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by dc93 »

TMF down 5% today...
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

dc93 wrote: Fri Aug 06, 2021 11:09 am TMF down 5% today...
I guess it's the strong jobs report, moving potential Fed action a bit closer.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Fonfo »

Yes... Jobs up, economy up, inflation and interest rates moving up in the horizon. I would say by December we can see maybe already one raise. The worst thing is that is also a negative thing for the stocks in theory.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by chrisdds98 »

tomphilly wrote: Fri Aug 06, 2021 11:14 am
dc93 wrote: Fri Aug 06, 2021 11:09 am TMF down 5% today...
I guess it's the strong jobs report, moving potential Fed action a bit closer.
i guess the market isn't terribly concerned about delta. hope we don't go back into lockdown
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by drumboy256 »

dc93 wrote: Fri Aug 06, 2021 11:09 am TMF down 5% today...
Yeah but UPRO up. It's funny, wiped out my gains on TMF but now greener on URPO. It really is a wonder. :beer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

If you go with 30% UPRO and 70% NTSI, you'd get a 2x leveraged 80/20 stocks/bonds portfolio with balanced international exposure
30% UPRO
-> 90% us
70% NTSI
-> 60% international
-> 40% intermediate treasuries
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

If you held SPY calls with comparable leverage and volatility to UPRO, instead of holding UPRO, would calls survive and recover from a >=33% intraday SPY flash crash better than UPRO? According to the ProShares UPRO prospectus, the full principal could go to 0% in a day. I'm not sure how this is possible with the market circuit breakers.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Spy calls would do just fine if there were a flash crash. The only way I could see a flash crash wiping out calls would be if the flash crash happened right as your calls were expiring. If you roll your calls before expiration, that wouldn't be a problem. I think UPRO might be erring on the side of caution in their prospectus.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Noobvestor »

These threads are endless. Can someone really just ELI5/TLDR this? All I'm seeing is crazy risk that has (narrowly) panned out to date in a US bull market but has also brought people to the brink of ruin. Is there like a post or a wiki page or an article that lays out the pros/cons, risks/rewards in one place without slogging through? I've seen the basic 'pro' arguments and some smaller 'con' arguments, just looking for a summary layout somewhere. :shock:
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by rchmx1 »

Noobvestor wrote: Sun Aug 08, 2021 2:26 am These threads are endless. Can someone really just ELI5/TLDR this? All I'm seeing is crazy risk that has (narrowly) panned out to date in a US bull market but has also brought people to the brink of ruin. Is there like a post or a wiki page or an article that lays out the pros/cons, risks/rewards in one place without slogging through? I've seen the basic 'pro' arguments and some smaller 'con' arguments, just looking for a summary layout somewhere. :shock:
Just summarize it yourself? By reading and then reflecting on HF's first posts in each thread. Everything beyond that is just us being social and sometimes sharing our own notions of how the future may play out.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Noobvestor »

rchmx1 wrote: Sun Aug 08, 2021 3:02 am
Noobvestor wrote: Sun Aug 08, 2021 2:26 am These threads are endless. Can someone really just ELI5/TLDR this? All I'm seeing is crazy risk that has (narrowly) panned out to date in a US bull market but has also brought people to the brink of ruin. Is there like a post or a wiki page or an article that lays out the pros/cons, risks/rewards in one place without slogging through? I've seen the basic 'pro' arguments and some smaller 'con' arguments, just looking for a summary layout somewhere. :shock:
Just summarize it yourself? By reading and then reflecting on HF's first posts in each thread. Everything beyond that is just us being social and sometimes sharing our own notions of how the future may play out.
I've scanned those but that's just one side of the story - the 'pro' argument is presented succinctly, but the con arguments are spread across over hundreds of pages - I had hoped (perhaps naively) that the latter might also be gathered in one collected place.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Fonfo »

The con arguments are, as always, the fear of tmf not being as good hedge in the future for stocks as it has been in the past, considering the low rates environment at the moment. Also tmf returns for the next year might be not so vigorous as before for the same reasons.

Also a possible rare event like black Monday might be seen as a deal breaker for taking this strategy for the long run. 20% is the maximum stock market is able to drop in a single day but it would damage the returns considerably even after a market recovery.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

I've been wondering about how much drag would come from rebalancing a HFEA variant in a taxable account. This is of interest if a taxable account is all that one has available with the LETFs, or if deciding between taxable versus tax-deferred (tax-deferred is cheaper during growth but perhaps more expensive during decumulation).

So I did a little calculation of what the tax consequences would be for rebalancing events. From this, I could get a rough estimate of annual tax drag compared to the portfolio and to the returns. The calculation assumes an initial lump sum with no additions.

I followed M1's strategy of selecting short-term losses, long-term losses, long-term gains, and short-term gains in order.

I looked at straight 55/45 UPRO/TMF from 1986 to present with rebalancing every 6 weeks.

In any particular year, the LTCG from rebalancing is usually considerably less than portfolio returns, but there are years when the LTCG exceeds returns. There are years when returns or LTCG or both would have been negative.

ST values are usually net losses that are much smaller than the LT component. Occasional years show ST gains.

The tax consequences are partly due to rebalancing from returns and partly due to rebalancing due to volatility. So the two metrics are capital gains/portfolio gains and capital gains/portfolio value. I guess one doesn't mind the first as much as the second...

As a ballpark figure, I calculate the ratio of LTCG from rebalancing to portfolio returns gradually increasing to over 23%. At 15 and 20% tax rate, about 3.3 to 4.4% of annual gains are taxed at LTCG on average (neglecting the 0% bracket) after the first year.

Over the same period, the average LTCG as a proportion of the average portfolio value during the year settles to between 10 and 12%.

So on average, that's like a 1.5 to 2.4% ER on top of the actual ER, depending on tax rate.

With quarterly rebalancing, LTCG/returns rises to 16% and LTCG/value settles to around 7%. So taxes would be about 2/3 as large.

With 6-week rebalancing to maintain a fixed risk budget, LTCG/returns rises to 32% and LTCG/value settles to around 11%. So a bit higher drag.

Changing to a 30/25/45 UPRO/TQQQ/TMF, with quarterly rebalancing, LTCG/returns is 20% and LTCG/value settles to around 11%. Roughly comparable to 55/45 UPRO/TMF.

With 6-week rebalancing to maintain a fixed risk budget, same LETFs, LTCG/returns rises to 27% and LTCG/value settles to around 12%. A bit higher drag to maintain smaller volatility.

With six or seven LETFs, the peak drag occurs earlier, with LTCG/returns peaking to 40% during the dot-com bubble and LTCG/value peaking at 26%, then tailing off to 26% and 14%, respectively.

So running this in taxable may create a significant tax drag, depending on how large the portfolio is, how active the market is, and the rebalancing strategy. This may still be quite workable in a taxable account for the simpler rebalancing strategies though.

Hope this is interesting.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

Noobvestor wrote: Sun Aug 08, 2021 3:23 am I've scanned those but that's just one side of the story - the 'pro' argument is presented succinctly, but the con arguments are spread across over hundreds of pages - I had hoped (perhaps naively) that the latter might also be gathered in one collected place.
The main pro is you won't find another diversified, macroeconomic investment strategy with a 100 year track record anywhere near HFEA's CAGR. Its Sharpe ratio is pretty excellent. The main con is like any other investment - the future is uncertain. The second con is psychological - this strategy endures massive fluctuations that may be unbearable, with longer underwater periods than unleveraged 60/40. Typically, we are less concerned about UPRO, more concerned about TMF, and whether it will continue to A) act as a strong hedge when we need it to and B) appreciate over time, for a variety of reasons (yields approaching 0%, inflation, etc).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Miggsy »

Noobvestor wrote: Sun Aug 08, 2021 3:23 am
rchmx1 wrote: Sun Aug 08, 2021 3:02 am
Noobvestor wrote: Sun Aug 08, 2021 2:26 am These threads are endless. Can someone really just ELI5/TLDR this? All I'm seeing is crazy risk that has (narrowly) panned out to date in a US bull market but has also brought people to the brink of ruin. Is there like a post or a wiki page or an article that lays out the pros/cons, risks/rewards in one place without slogging through? I've seen the basic 'pro' arguments and some smaller 'con' arguments, just looking for a summary layout somewhere. :shock:
Just summarize it yourself? By reading and then reflecting on HF's first posts in each thread. Everything beyond that is just us being social and sometimes sharing our own notions of how the future may play out.
I've scanned those but that's just one side of the story - the 'pro' argument is presented succinctly, but the con arguments are spread across over hundreds of pages - I had hoped (perhaps naively) that the latter might also be gathered in one collected place.
The Optimized Portfolio blog does an excellent job of summarizing some theory and statistics on the Hedgefundie Adventure, as well as other leveraged and unleveraged portfolios.

https://www.optimizedportfolio.com/hedg ... dventure/
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by huzaing »

I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Noobvestor wrote: Sun Aug 08, 2021 2:26 am These threads are endless. Can someone really just ELI5/TLDR this?

optimizedportfolio does a good job summarizing the main ideas of HFEA. However, there are a lot of random topics in this thread that aren't brought up in that page. I read through most of this thread, and about a quarter of the posts are about the elusive "rebalancing bonus." If you backtest HFEA with monthly, quarterly, and yearly rebalancing, the quarterly rebalancing outperforms by a lot. People discussed whether or not it's a result of accidental data mining. Some posters also discussed market timing strategies that limit downside but also limit upside.
There is also lots of discussion of alternatives to TMF. EDV, a long term treasury etf, is brought up as an alternative. VIX products like $VXX, $XVZ, $UVZ, and vixm are also brought up as alternative hedges because volatility generally spikes when the market crashes. There is also discussion about implementing the strategy using other methods like portfolio margin or futures.
Broadly speaking, most of this thread is about implementation details instead of theory.
Personally, I'm leaning towards using less leverage so I have less need for a hedge. If you're leveraging 3x, you need something pretty powerful to offset all of that risk. If you're only leveraging 1.5x, you could get away with less hedging. MotoTrojan's 43/57 UPRO/EDV, for example, is about 1.5x leveraged. It isn't reliant on 3x leveraged treasuries to smooth the ride. HFEA has similar cons to a 60/40 portfolio. Leveraged etfs add in additional concerns about volitility decay and high fees, but other than that, it's not that exotic.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Fonfo »

huzaing wrote: Mon Aug 09, 2021 11:17 am I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
How is that it would have 90% drop and it is less risky? Don't understand this statement.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

huzaing wrote: Mon Aug 09, 2021 11:17 am I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
That depends on how one defines risk. Sounds like the person who wrote the quote only cares about final value, which is not how normal investors/traders define risk. The max drawdown and volatility is much higher for the 2X funds is going to be higher than that of HFEA so risk is definitely higher by traditional definition. Keep in mind, the past is known so easy to find something that will give you high final value based on backtest. Future is unknown, so risk adjusted return is important to consider (metrics such as max DD and volatility is important).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

jarjarM wrote: Mon Aug 09, 2021 3:43 pm
huzaing wrote: Mon Aug 09, 2021 11:17 am I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
That depends on how one defines risk. Sounds like the person who wrote the quote only cares about final value, which is not how normal investors/traders define risk. The max drawdown and volatility is much higher for the 2X funds is going to be higher than that of HFEA so risk is definitely higher by traditional definition. Keep in mind, the past is known so easy to find something that will give you high final value based on backtest. Future is unknown, so risk adjusted return is important to consider (metrics such as max DD and volatility is important).
I think that the original discussion may have been based on SSO, so it didn't necessarily go back far enough to actually look at 2000 and 2008. A better test is with ULPIX here.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Hydromod wrote: Mon Aug 09, 2021 4:04 pm
jarjarM wrote: Mon Aug 09, 2021 3:43 pm
huzaing wrote: Mon Aug 09, 2021 11:17 am I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
That depends on how one defines risk. Sounds like the person who wrote the quote only cares about final value, which is not how normal investors/traders define risk. The max drawdown and volatility is much higher for the 2X funds is going to be higher than that of HFEA so risk is definitely higher by traditional definition. Keep in mind, the past is known so easy to find something that will give you high final value based on backtest. Future is unknown, so risk adjusted return is important to consider (metrics such as max DD and volatility is important).
I think that the original discussion may have been based on SSO, so it didn't necessarily go back far enough to actually look at 2000 and 2008. A better test is with ULPIX here.
Thanks for link. Yeah, I remember the discussion around ULPIX as a way of caution buy-n-hold LETFs. If one is down 90+%, it takes a while to dig back out of that hole.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by OohLaLa »

I never got the people who are fixated on holding only leveraged equities. You completely forego the superb dynamic between stocks and bonds.

At 1x, it can be argued it doesn't give the best outcome, if you are ok with the big drawdowns; you can easily end up with a higher "ending" number.

At 2x and 3x, though, not only are you getting into extreme drawdown territory, but you also forego a better CAGR.

There is no redeeming point for 100% stocks at 2x or 3x.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

OohLaLa wrote: Mon Aug 09, 2021 6:32 pm I never got the people who are fixated on holding only leveraged equities. You completely forego the superb dynamic between stocks and bonds.
I can understand it. Before I started researching this portfolio, I knew a lot less about bonds. Leverage is a complicated subject, and it doesn't make intuitive sense to apply leverage to a bond. A lot of brokers charge crazy margin rates well above the yield of any bond fund. Once you understand futures and how interest rates affect bond prices, it starts to make a lot more sense.

The boglehead conventional wisdom is that someone in their accumulation stage should have almost all of their money in stocks and stay the course, only including bonds if they can't stomach the downturns. This works fine for unleveraged portfolios, but if you leverage up 3x, you can get yourself set back quite a bit by leaving out hedges.

A sizable portion of this thread is about rebalancing and alternative hedges, because, while TMF is a really useful tool, it has some downsides. I can understand why someone could be uncertain about the validity of it as a hedge and be tempted to go without a hedge. I've read over the whole volcker/fed discussion earlier in the thread, and I'm not sure I get all of the nuances there.

Buy and hold SSO is less "risky" in the sense that it only depends on the fact that stocks tend to go up. HFEA depends on the slight negative correlation of stocks and long term treasuries and on a certain amount of fiscal discipline by the federal reserve.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tomphilly »

huzaing wrote: Mon Aug 09, 2021 11:17 am I was reading some recent discussion of this strategy and came across two similar comments:
For a long term buy and hold without a bunch of rebalancing, SPUU (2x VOO) is far safer. In another 2008 it would recover at almost exactly the same rate as VOO. It would drop more than HFEA (90% drop), so waaay more volatile, but far less risk.

SPUU has large drawdowns but aside from the psychological risk of selling during a draw down, SPUU is about as risky as QQQ. SPUU makes more than 55/45 UPRO/TMF and is less risky, even if the drawdowns are much higher.
I'm sure this has come up before on this forum.

Thoughts, comments?
SPUU/UBT is "Diet HFEA" - probably a better choice than 100% 2x SPY.

100% SPUU underperformed UPRO/TMF 60/40, at least since 2014, which is as far back as it can be backtested. If you backtest with 100% ULPIX, it's a disaster. It has a 16 year underwater period from the dotcom crash and underperforms SPY.

Holding just 2x SPY is interesting as a concept as it eliminates the uncertainty of treasuries, which is the bulk of this 190 page discussion, and it just relies on the relative certainty that the stock market will appreciate. But the drawdowns kill it. When coupled with VIXY (90/10 ULPIX/VIXY) it performs better than the Vanguard 500 benchmark without the epic drawdowns.

Is there a VIXY/VXX data import for Portfolio Visualizer that provides simulated data back to the inception of the VIX? VIXY seems to be the oldest ticker but only goes back to 2012.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

I'll take PSLDX over SPUU/UBT any day.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Ramjet »

OohLaLa wrote: Mon Aug 09, 2021 6:32 pm I never got the people who are fixated on holding only leveraged equities. You completely forego the superb dynamic between stocks and bonds.
Agree 100%, a better choice IMO is just to simply increase equities and reduce treasuries, but leave enough treasuries to still remain beneficial. Maybe something like 65/35 or 70/30 UPRO/TMF, just know you better buckle up :twisted:
Last edited by Ramjet on Tue Aug 10, 2021 9:02 am, edited 1 time in total.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by AllomancerJack »

I want to use similar risk parity approach and it is desirable that I wouldn't create any taxable events during rebalance (I'm non-US and selling assets or getting dividends would add lots of bureaucratic burden to me).
Also I don't want to take much more risk compared to traditional two fund portfolio.

So my plan is:
1) Use non-leveraged, accumulating UCITS ETFs, so I'll never get dividends
2) Build optimal (w.r.t risk-return ratio) two fund portfolio using (for example) CSPX and DTLA
3) Apply some (not much) leverage using IBKR margin account
4) Don't sell anything on quarterly rebalance - that would involve increasing margin to buy more of either stock or bond part of portfolio.
Hopefully, portfolio as a whole would grow over time so I could rebalance this way without getting out of comfortable margin level.
In a worst case I would be forced to sell, decreasing margin and creating undesirable taxable event.

But I'm not sure if its worth it (instead of just two fund portfolio), considering that margin should be low (to be able to rebalance without selling).

Any suggestions/critique/recommendations would be appreciated!
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by huzaing »

DMoogle wrote: Tue Aug 10, 2021 8:07 am I'll take PSLDX over SPUU/UBT any day.
Why so, can you please explain the reason
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by jarjarM »

Ramjet wrote: Tue Aug 10, 2021 8:59 am
OohLaLa wrote: Mon Aug 09, 2021 6:32 pm I never got the people who are fixated on holding only leveraged equities. You completely forego the superb dynamic between stocks and bonds.
Agree 100%, a better choice IMO is just to simply increase equities and reduce treasuries, but leave enough treasuries to still remain beneficial. Maybe something like 65/35 or 70/30 UPRO/TMF, just know you better buckle up :twisted:
I agree, just tune the stock/bond ratio to one's desire risk/performance tolerance and then sit back and watch :twisted:
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