WSJ: leveraged portfolios are good for you!

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AnnetteLouisan
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Re: WSJ: leveraged portfolios are good for you!

Post by AnnetteLouisan »

mikejuss wrote: Sat Oct 16, 2021 12:15 pm The drift of this article, and of the news that Vanguard is adding a private-equity position to their target-date funds, is to normalize riskier and riskier behavior in search of added yield for those who, frankly, have not saved adequately for their retirement. It's all pretty depressing. I can only hope that by saving and living below my means today I won't have to go searching for leveraged bets to afford my retirement tomorrow.
Reminds me of a quote from the Studs Terkel book Hard Times, interviews from folks who survived the Great Depression. About the Roaring 20s, one said „it was expensive dogs chasing expensive cats…“
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Re: WSJ: leveraged portfolios are good for you!

Post by seajay »

Random Walker wrote: Sat Oct 16, 2021 8:46 am My understanding of leverage is that the expected return (simple average) goes up proportionate to the leverage factor, but the variance drain increases disproportionately because it is a function of SD^2. So the increased “expected return” should really not be as big as people think. The drag caused by volatility is especially high for super equity heavy investments.

Dave
ULPIX, a 2x SPY, 1998 to 2020 inclusive saw yearly average of around 1.5 times SPY whilst the standard deviation was near double. Approximating the CAGR from the values yielded 8% CAGR in both cases, actual figures were around 7% versus 8% but that is biased by start/end date values where the 2x tends to zigzag around the 1x. i.e. reward expectancy of a similar broad CAGR but with twice the volatility along the way.

Even 1x stock are leveraged, of the order $30T stock market cap, $9T corporate bond cap, so close to 75/25 stock/bonds deleverages stocks. De-leveraged stocks (75/25 stock/bonds) 1972 to recent has broadly rewarded much the same as the leveraged (100% stock)
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Re: WSJ: leveraged portfolios are good for you!

Post by FiveFactor »

Leveraging a single risk factor? Sounds way to risky for me.
Small/Value/Profitability: | 30% AVUV | 30% AVDV | 30% AVES | Momentum: | 5% QMOM | 5% IMOM | Volatility: | 0.1% PUTW | Term: | 0.1% BND
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
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Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

000 wrote: Sat Oct 16, 2021 5:48 pm
willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
So why are they kosher? Are only 2x and 3x funds evil now?
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

willthrill81 wrote: Sat Oct 16, 2021 5:59 pm
000 wrote: Sat Oct 16, 2021 5:48 pm
willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
So why are they kosher? Are only 2x and 3x funds evil now?
Either because they internally rebalance or my theory which is that Vanguard doesn't want to deal with the trading traffic of HFEA types on its brokerage platform which is a loss leader (no commissions, no PFOF) as well as the (low but non zero) potential for liability under the 'suitability' standard.
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Re: WSJ: leveraged portfolios are good for you!

Post by typical.investor »

000 wrote: Sat Oct 16, 2021 6:46 pm
willthrill81 wrote: Sat Oct 16, 2021 5:59 pm
000 wrote: Sat Oct 16, 2021 5:48 pm
willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
So why are they kosher? Are only 2x and 3x funds evil now?
Either because they internally rebalance or my theory which is that Vanguard doesn't want to deal with the trading traffic of HFEA types on its brokerage platform which is a loss leader (no commissions, no PFOF) as well as the (low but non zero) potential for liability under the 'suitability' standard.
HFEA types generally rebalance quarterly. How is that much trading traffic?

Anyway I suspect they don’t want the administrative overhead of having to obtain and maintain a current customer disclosure agreement pertaining to the specific leveraged risks. Ok it’s like two clicks and maybe checking a select box for the ok at Schwab, but Vanguard probably doesn’t want to do anything to set it up.

If it really were nannying, they why does Vanguard allow options trading? 3X leveraged ETFs pale in comparison to the risks posed by options.

Rather, I would agree Vanguard is trying to limit liability.

In any case, it’s difficult for me to see how NTSX could be viewed as ‘dangerous’. 3X leveraged funds though don’t track 3X the index. Yet, there are posters on Bogleheads who very vocally INSIST they do and INSIST they must. With the level of misunderstanding around them, it’s no wonder Vanguard is cautious.
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

typical.investor wrote: Sat Oct 16, 2021 7:20 pm HFEA types generally rebalance quarterly. How is that much trading traffic?
Oh, I didn't mean to indicate it was a rational view but merely something some exec might think.
Anyway I suspect they don’t want the administrative overhead of having to obtain and maintain a current customer disclosure agreement pertaining to the specific leveraged risks. Ok it’s like two clicks and maybe checking a select box for the ok at Schwab, but Vanguard probably doesn’t want to do anything to set it up.

If it really were nannying, they why does Vanguard allow options trading? 3X leveraged ETFs pale in comparison to the risks posed by options.

Rather, I would agree Vanguard is trying to limit liability.

In any case, it’s difficult for me to see how NTSX could be viewed as ‘dangerous’. 3X leveraged funds though don’t track 3X the index. Yet, there are posters on Bogleheads who very vocally INSIST they do and INSIST they must. With the level of misunderstanding around them, it’s no wonder Vanguard is cautious.
I agree. Per your comments on options I would imagine the reason is because there are legitimate, from Vanguard's view, reasons to use options.
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Re: WSJ: leveraged portfolios are good for you!

Post by quattro73 »

willthrill81 wrote: Sat Oct 16, 2021 1:48 pm
BogleFan510 wrote: Sat Oct 16, 2021 12:00 pm
CletusCaddy wrote: Fri Oct 15, 2021 4:30 pm
BogleFan510 wrote: Fri Oct 15, 2021 4:22 pm More bad journalism from the WSJ, likely born from advertiser conflicts of interest. Ignore the financial media noise and stay the course.
What exactly in the article do you find to be “bad journalism”?
One only has to read the first two sentences. Classic fearmongering. Market close to all time highs (scary). Except that it always is, normally as it grows constantly.

Nowhere to run, no where to hide...as if something is different this time and the past methods no longer work. Absolute BS.
I definitely get your point and agree that the tactics and perhaps the motivations of the author are highly questionable.

But at the same time, we haven't been in a position where valuations (as measured by metrics like CAPE) have been this high combined with interest rates being this low. We truly are in uncharted waters. And considering that valuations have generally portended low stock returns, and starting bond yields have been very indicative of future returns, the mid-term future might not turn out so great for many investors.

OTOH, we're always in uncharted waters by some metric. As Heraclitus said, "You cannot step in the river in the same place twice."

No guarantees, and YMMV.
Thank you. Wisest thing I have read lately.
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Re: WSJ: leveraged portfolios are good for you!

Post by adamhg »

I wonder if some of the same people in this thread arguing against leverage also argue for 100% time in the market. What about the volatility drag of a 1x levered portfolio? Why not 0.5x leverage? Why not 0x leverage? What makes 1x leverage so special? And what makes > 1x so reviled?
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

adamhg wrote: Sat Oct 16, 2021 7:46 pm I wonder if some of the same people in this thread arguing against leverage also argue for 100% time in the market. What about the volatility drag of a 1x levered portfolio? Why not 0.5x leverage? Why not 0x leverage? What makes 1x leverage so special? And what makes > 1x so reviled?
What would a portfolio with 0x leverage look like? A long-short neutral position?

Anyway, what makes 1x leverage so special is that it doesn't involve any exotica like borrowing risk or short risk.
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Re: WSJ: leveraged portfolios are good for you!

Post by JackoC »

000 wrote: Sat Oct 16, 2021 7:55 pm
adamhg wrote: Sat Oct 16, 2021 7:46 pm I wonder if some of the same people in this thread arguing against leverage also argue for 100% time in the market. What about the volatility drag of a 1x levered portfolio? Why not 0.5x leverage? Why not 0x leverage? What makes 1x leverage so special? And what makes > 1x so reviled?
What would a portfolio with 0x leverage look like? A long-short neutral position?

Anyway, what makes 1x leverage so special is that it doesn't involve any exotica like borrowing risk or short risk.
In a stock/'riskless' asset portfolio 0X, ie. L=0 would be 100% riskless asset. But by extension it could be anything else with no net equity position.
In theory return=L*mu-(L-1)*r+.5*L*(L-1)*vol^2 with mu the stock expected return and r the riskless return. L=0 and L=1 are the two cases where vol has no direct impact on portfolio return, it's just the riskless return or stock return respectively. At 0<L<1 higher vol boosts portfolio return (more 'rebalancing bonus'). At L>1 higher vol subtracts from portfolio return (more 'volatility drag').

It's reasonable in many people's practical situation to view lending (L<1) as very different than borrowing (L>1). But in other people's situations there is no real sharp break right at L=1. L=1, unhedged, would be much too risky for my taste, but I use index futures in IRA to 'rebalance' around a target of L<1, so there would be no mechanical difference if I used them as part of maintaining a position L>1.
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

JackoC wrote: Sun Oct 17, 2021 12:35 pm In a stock/'riskless' asset portfolio 0X, ie. L=0 would be 100% riskless asset. But by extension it could be anything else with no net equity position.
In theory return=L*mu-(L-1)*r+.5*L*(L-1)*vol^2 with mu the stock expected return and r the riskless return. L=0 and L=1 are the two cases where vol has no direct impact on portfolio return, it's just the riskless return or stock return respectively. At 0<L<1 higher vol boosts portfolio return (more 'rebalancing bonus'). At L>1 higher vol subtracts from portfolio return (more 'volatility drag').

It's reasonable in many people's practical situation to view lending (L<1) as very different than borrowing (L>1). But in other people's situations there is no real sharp break right at L=1. L=1, unhedged, would be much too risky for my taste, but I use index futures in IRA to 'rebalance' around a target of L<1, so there would be no mechanical difference if I used them as part of maintaining a position L>1.
I've not seen 0x leverage as a short hand for 100% T-bills because, indeed, one could leverage T-bills? Would 3x T-bills be 3x x 0x = 0x levered?
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Re: WSJ: leveraged portfolios are good for you!

Post by JackoC »

000 wrote: Sun Oct 17, 2021 4:30 pm
JackoC wrote: Sun Oct 17, 2021 12:35 pm In a stock/'riskless' asset portfolio 0X, ie. L=0 would be 100% riskless asset. But by extension it could be anything else with no net equity position.
In theory return=L*mu-(L-1)*r+.5*L*(L-1)*vol^2 with mu the stock expected return and r the riskless return. L=0 and L=1 are the two cases where vol has no direct impact on portfolio return, it's just the riskless return or stock return respectively. At 0<L<1 higher vol boosts portfolio return (more 'rebalancing bonus'). At L>1 higher vol subtracts from portfolio return (more 'volatility drag').

It's reasonable in many people's practical situation to view lending (L<1) as very different than borrowing (L>1). But in other people's situations there is no real sharp break right at L=1. L=1, unhedged, would be much too risky for my taste, but I use index futures in IRA to 'rebalance' around a target of L<1, so there would be no mechanical difference if I used them as part of maintaining a position L>1.
I've not seen 0x leverage as a short hand for 100% T-bills because, indeed, one could leverage T-bills? Would 3x T-bills be 3x x 0x = 0x levered?
The assumption about 'leverage' in that equation is that it's on stocks, >1 or <1 meaning borrowing/lending at the 'riskless' rate, back to the CAPM foundation of 'modern finance'. But you're right if you introduce the possibility of borrowing money to buy medium or long term bonds (borrowing money to buy T-bills wouldn't typically make much sense) then you've got another set of possibilities. But again as to that equation, L=0 means all in the riskless asset.
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

JackoC wrote: Sun Oct 17, 2021 4:43 pm The assumption about 'leverage' in that equation is that it's on stocks, >1 or <1 meaning borrowing/lending at the 'riskless' rate, back to the CAPM foundation of 'modern finance'. But you're right if you introduce the possibility of borrowing money to buy medium or long term bonds (borrowing money to buy T-bills wouldn't typically make much sense) then you've got another set of possibilities. But again as to that equation, L=0 means all in the riskless asset.
I don't think adamhg meant 0% stocks by 0x leverage and 50% stocks by 0.5x leverage as this thread is about levering balanced portfolios and we consider NTSX to be 1.5x and PSLDX to be 2x levered.

If someone tells me their portfolio is 0x levered I'm going to assume they are wholly invested in a long short fund.
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Re: WSJ: leveraged portfolios are good for you!

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typical.investor wrote: Sat Oct 16, 2021 7:20 pm In any case, it’s difficult for me to see how NTSX could be viewed as ‘dangerous’. 3X leveraged funds though don’t track 3X the index. Yet, there are posters on Bogleheads who very vocally INSIST they do and INSIST they must. With the level of misunderstanding around them, it’s no wonder Vanguard is cautious.
Huh? Don't they track 3X the daily return of the index before costs? I've been holding them for over 2 years, and they seem to do a pretty good job of it.
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Re: WSJ: leveraged portfolios are good for you!

Post by typical.investor »

cos wrote: Sun Oct 17, 2021 5:40 pm
typical.investor wrote: Sat Oct 16, 2021 7:20 pm In any case, it’s difficult for me to see how NTSX could be viewed as ‘dangerous’. 3X leveraged funds though don’t track 3X the index. Yet, there are posters on Bogleheads who very vocally INSIST they do and INSIST they must. With the level of misunderstanding around them, it’s no wonder Vanguard is cautious.
Huh? Don't they track 3X the daily return of the index before costs? I've been holding them for over 2 years, and they seem to do a good job of it.
One day yes. Over time? They might. They might not. It depends on the index return and volatility. Read the prospectus.
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Re: WSJ: leveraged portfolios are good for you!

Post by cos »

typical.investor wrote: Sun Oct 17, 2021 5:44 pm One day yes. Over time? They might. They might not. It depends on the index return and volatility. Read the prospectus.
Well, of course! They only claim to leverage the daily returns of their respective indices. It's often right there in the summary or even the title, too, no need to read the prospectus*.

For example: ProShares UltraPro S&P500 (UPRO)
ProShares UltraPro S&P500 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the S&P 500®.
Another example: Direxion Daily S&P 500® Bull (SPXL) and Bear (SPXS) 3X Shares
The Direxion Daily S&P 500® Bull (SPXL) and Bear (SPXS) 3X Shares seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the S&P 500® Index. There is no guarantee the funds will meet their stated investment objectives.
Emphasis mine. They don't try to hide any of this so I don't see why anyone would assume otherwise.

* Of course, one should always read the prospectus of any fund they purchase, leveraged or not.
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Re: WSJ: leveraged portfolios are good for you!

Post by typical.investor »

cos wrote: Sun Oct 17, 2021 5:55 pm
typical.investor wrote: Sun Oct 17, 2021 5:44 pm One day yes. Over time? They might. They might not. It depends on the index return and volatility. Read the prospectus.
Well, of course! They only claim to leverage the daily returns of their respective indices. It's often right there in the summary or even the title, too, no need to read the prospectus*.

For example: ProShares UltraPro S&P 500 (UPRO)
ProShares UltraPro S&P500 seeks daily investment results, before fees and expenses, that correspond to three times (3x) the daily performance of the S&P 500®.
Another example: Direxion Daily S&P 500 Bull (SPXL) and Bear (SPXS) 3X Shares
The Direxion Daily S&P 500® Bull (SPXL) and Bear (SPXS) 3X Shares seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the S&P 500® Index. There is no guarantee the funds will meet their stated investment objectives.
Emphasis mine. They don't hide any of this. I don't understand why people would assume otherwise.

* Of course, one should always read the prospectus of any fund they hold, leveraged or not.
Ok well don’t read the prospectus if you don’t want to, but the graphs on the volatility effects are worth looking at.

For instance, you will see in a flat market (0% returns) which highish volatility (25%). The long 3X equity fund will lose 17.1% over the course of a year with no rebalancing.

Actually, there are posters here who are extremely insistent that the 3X fund WILL track the index over time and that it MUST track the index because hedge fund investors will make it so.

I use 3X funds myself, but truth be told certain combinations of returns and volatility can conspire against us. Quarterly rebalancing from a safe asset will likely help offset any negative volatility effect, but the HFEA thread is now suggesting and alternative of 50% 3X stocks and 50% intermediate term treasury futures (so as to have a lot of leverage when young). I'm not sure where you'd rebalance from if both do poorly, but having most of your money in 3X stocks and using futures leverage might not leave much rebalancing room (new contributions perhaps) if things go sideways. You'd need to be putting money in just to stave off a margin call on the futures.
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Re: WSJ: leveraged portfolios are good for you!

Post by cos »

typical.investor wrote: Sun Oct 17, 2021 6:04 pm Ok well don’t read the prospectus if you don’t want to, but the graphs on the volatility effects are worth looking at.

For instance, you will see in a flat market (0% returns) which highish volatility (25%). The long 3X fund will lose 17.1% over the course of a year with no rebalancing.
Oh no, trust me, I've read the prospectuses for all three of the leveraged ETFs I hold, and the tables and graphs to which you refer are indeed beautifully illustrative. For the benefit of those following along, here are some examples from UPRO's prospectus:

Image

Image
typical.investor wrote: Sun Oct 17, 2021 6:04 pm Actually, there are posters here who are extremely insistent that the 3X fund WILL track the index over time and that it MUST track the index because hedge fund investors will make it so.

I use 3X funds myself, but truth be told certain combinations of returns and volatility can conspire against us.
Ah, I think I might know who you're talking about, and I don't believe they are representative of most investors. I believe most who hold these funds long-term are aware of how they function and make no such assumptions about their return distributions. As you pointed out, depending on the sequence of daily returns and volatility, 3x daily releveraged ETFs can return far less or far more than 3x the return of the underlying index over periods longer than one day.

I think most understand that, and I don't think Vanguard is right to limit their usage.
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Re: WSJ: leveraged portfolios are good for you!

Post by typical.investor »

cos wrote: Sun Oct 17, 2021 7:13 pm

Image
Yeah, you do understand perfectly. That is a great chart. The important thing is to increase your exposure when it's down 20, 30 or 35%. Hopefully, that will line up one's rebalancing scheme well enough and offset the volatility decay we see in the first example.

Some of the suggested portfolios I see in the HFEA don't really allow for that though, as they are over leveraged and won't offer a safe asset to rebalance from. If rates rise, you might need to put more into both stocks and bonds. Hedgefundie always acknowledged that and limited the amount to a subset of your portfolio, but now we see people recommending 50% 3X stocks and 50% 3X intermediate treasuries with all your money. Unless new contributions are sufficient, you could be at risk of realizing a volatility loss. Not saying that's the most likely case, but one that should be prepared for I think.
cos wrote: Sun Oct 17, 2021 7:13 pm Ah, I think I might know who you're talking about, and I don't believe they are representative of most investors. I believe most who hold these funds long-term are aware of how they function and make no such assumptions about their return distributions.

...
I think most understand that, and I don't think Vanguard is right to limit their usage.
Well, there is enough misunderstanding out there to make Vanguard pause about liability I think. Or they just don't want to obtain a statement of understanding from everyone.
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Re: WSJ: leveraged portfolios are good for you!

Post by JackoC »

000 wrote: Sun Oct 17, 2021 4:47 pm
JackoC wrote: Sun Oct 17, 2021 4:43 pm The assumption about 'leverage' in that equation is that it's on stocks, >1 or <1 meaning borrowing/lending at the 'riskless' rate, back to the CAPM foundation of 'modern finance'. But you're right if you introduce the possibility of borrowing money to buy medium or long term bonds (borrowing money to buy T-bills wouldn't typically make much sense) then you've got another set of possibilities. But again as to that equation, L=0 means all in the riskless asset.
I don't think adamhg meant 0% stocks by 0x leverage and 50% stocks by 0.5x leverage as this thread is about levering balanced portfolios and we consider NTSX to be 1.5x and PSLDX to be 2x levered.

If someone tells me their portfolio is 0x levered I'm going to assume they are wholly invested in a long short fund.
Yes, some discussion on this thread (and the original WSJ article) is about leveraged portfolio's with three components. The simple equation assumes two, stock and 'riskless', you're borrowing at 'riskless' when L>1, lending at 'riskless' when L<1. Funds like NTSX have three components: stock, short term riskless (the borrowing rate) and med/long 'riskless' (the bond yield). The equation for that case would be longer with correlation terms. But, not fundamentally different. Say you lever a 'balanced portfolio' 4X, which you could easily do using stock index and treasury note futures. Do you think that would mean no volatility drag because it's 'balanced'?

And look at posts just after our exchange where people go back to 'debating' whether a simple 3X (stock, short term borrowing) fund delivers less than 3X the expected stock return with one poster appearing to claim that's actually the return. So understanding and accepting the equation, Return=L*mu+(L-1)*r+.5*L*(L-1)*vol^2 in the two asset case is indeed relevant to this thread, on a 'crawl before you walk' basis. If you don't understand that equation, and that it explains leveraged returns pretty well over an extended period historically*, you can't proceed to any sensible discussion where you add the bell/whistle of leveraging both stocks and medium term bonds with short term borrowing.

If everyone understands and accepts how the 2 asset (stock plus riskless borrowing) leverage case actually works, then let's quibble that NTSX or PSLDX are a little more complicated than that, or even get into the meaningless semantic discussion, practically, of what '0% leverage' means. :happy

*quoting myself from another thread, S&P Total Return index and a short term borrowing proxy, 6/1/1988 to recently
SPTR CAGR 11.19% pa. short term proxy CAGR 3.43% pa.
L=.6, 60%*11.19%+40%*3.43%=8.08% The actual daily rebalanced return was 8.44%: 'rebalancing bonus' 0.35% pa.
L=2, 2X position. 2*SPTR-money market return=18.95%, actual portfolio return 15.68%: 'vol drag' 3.27% pa.
L=3, 3*SPTR-2*money market=26.71%, actual return 16.41%, vol drag 10.3% pa.

What volatility would you have to plug into the equation to give those three answers? 17.2%, 18.1% and 18.5% respectively. Whereas the actual annualized vol of the data series was 18.0%. Pretty close, likewise plugging in the realized vol, would have estimated the third term as +.4%, -3.2% and -9.7% respectively. This is a typical result AFAIK: approximation of drag as proportional to .5*vol^2 is a pretty good estimate over extended periods for various asset classes.
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Re: WSJ: leveraged portfolios are good for you!

Post by abc132 »

My personal concerns about leveraged portfolios are the ability to provide non-stock assets that will have enough negative correlation for every possible downturn that the future might reasonably present in addition to the inability to understand exactly what fund X is specifically doing to provide that leverage, and the unknown risks posed by the funds day to day implementation.

I don't have anything against others using them or in Vanguard finding a way to allow them, but it does seem silly to have a plan that needs this product after such a great period of market performance. Unless we are new to Bogleheads or in our first decade of investing we should generally be years ahead of schedule and in a position not to have to chase performance. Those just starting should hope for early underperformance - as those of us that really began early investing through 2000 and 2008 have found out.

For anyone that understands that their 3x fund can be down more than 50% on a day when the fund it tracks is up 8%, leverage is certainly something to consider. It doesn't take much imagination to understand what would happen to a portfolio if the other asset with supposed negative correlation to the leveraged fund also underperforms on that day. One RBD (really bad day) could really ruin this strategy even for black swans with only a 0.01% chance of this happening on a daily basis.
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Re: WSJ: leveraged portfolios are good for you!

Post by Forester »

During a recent interview the Bogleheads are mentioned at this time stamp; https://youtu.be/SJ8-hG3ZMXY?t=3660

This is their return stacked index referenced in the interview https://investresolve.com/strategies/re ... urn-index/
Amateur Self-Taught Senior Macro Strategist
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Re: WSJ: leveraged portfolios are good for you!

Post by taojaxx »

garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Spot on remarks. As one of those non risk adverse individuals running a reckless HFEA cum futures portfolios, I printed this and framed it on my desk, to constantly be reminded of the potential lethal downside.
I by the way give ZERO credence to those awesome Portfolio Visualizer back tests: PV runs on end of month prices. Drilling down to daily data in March 2020 shows that most leveraged portfolios would have blown up mid-month. HFEA only survived due to TMF supercharged bond convexity.
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Re: WSJ: leveraged portfolios are good for you!

Post by nisiprius »

L2F wrote: Sat Oct 16, 2021 10:35 am
nisiprius wrote: Sat Oct 16, 2021 7:42 am...The use of leverage in this strategy doesn't increase risk[/b], not because of predicted relationships between assets in the future, but simply because of brute force dilution. NTSX is riskier but you use less of it...
That's basically buying this "alpha strategy" on margin using 60/40 portfolio as collateral.
How you can be so sure it doesn't increase risk?
I was too vague. Obviously it depends on what goes into the "alpha strategy." But 1.5X leverage used on ⅔ of the portfolio is less risky than 1.5X leverage on 100% of the portfolio. I admit that I was thinking of this as a way to take advantage of something that has relatively low risk and relatively low return that's expected to be uncorrelated with stocks, e.g. some market neutral funds.
skierincolorado wrote: Sat Oct 16, 2021 2:40 pm Unless the other 1/3 is in cash, it's a leveraged strategy.
Say "gotcha" if you like. OK. Touché. But...

"Jason Zweig reports mildly favorably about a specific strategy that includes the use of a limited amount of leverage on part of the portfolio"

is not equivalent to

"the Wall Street Journal endorses all leveraged portfolios."
  • Leverage on ⅔ of the portfolio is not the same as leverage on the whole portfolio.
  • 1.5X leverage is not the same as 3X leverage.
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

nisiprius wrote: Mon Nov 22, 2021 8:52 am
L2F wrote: Sat Oct 16, 2021 10:35 am
nisiprius wrote: Sat Oct 16, 2021 7:42 am...The use of leverage in this strategy doesn't increase risk[/b], not because of predicted relationships between assets in the future, but simply because of brute force dilution. NTSX is riskier but you use less of it...
That's basically buying this "alpha strategy" on margin using 60/40 portfolio as collateral.
How you can be so sure it doesn't increase risk?
I was too vague. Obviously it depends on what goes into the "alpha strategy." But 1.5X leverage used on ⅔ of the portfolio is less risky than 1.5X leverage on 100% of the portfolio. I admit that I was thinking of this as a way to take advantage of something that has relatively low risk and relatively low return that's expected to be uncorrelated with stocks, e.g. some market neutral funds.
skierincolorado wrote: Sat Oct 16, 2021 2:40 pm Unless the other 1/3 is in cash, it's a leveraged strategy.
Say "gotcha" if you like. OK. Touché. But...

"Jason Zweig reports mildly favorably about a specific strategy that includes the use of a limited amount of leverage on part of the portfolio"

is not equivalent to

"the Wall Street Journal endorses all leveraged portfolios."
  • Leverage on ⅔ of the portfolio is not the same as leverage on the whole portfolio.
  • 1.5X leverage is not the same as 3X leverage.
1.5x leverage on 2/3 of the portfolio IS the same as 1.33x leverage on the whole portfolio, unless the other 1/3 is in cash.
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Re: WSJ: leveraged portfolios are good for you!

Post by Phil DeMuth »

What are people are using for the "returns stacking" outside investments to complete the NTSX portfolio?
The authors talk about using Managed Futures or Global Macro liquid alternative funds, but these show a wide range of returns, which takes us back to the difficult Boglehead problem with active management and picking winners. Gold or commodities might be another answer. But the search of uncorrelated asset classes with a positive expected return is not easy.
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Re: WSJ: leveraged portfolios are good for you!

Post by Nathan Drake »

Hmmmm, levering up on the two most overvalued assets in the market at a time of rising inflation, what could go wrong?
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Re: WSJ: leveraged portfolios are good for you!

Post by nisiprius »

skierincolorado wrote: Mon Nov 22, 2021 9:59 am1.5x leverage on 2/3 of the portfolio IS the same as 1.33x leverage on the whole portfolio, unless the other 1/3 is in cash.
OK, I get what you're saying, and I need to correct myself.

With 1.5X leverage on a portfolio, you're borrowing ½ of the value of the portfolio. With 1.5X leverage on ⅔ of the portfolio, you're borrowing ⅓ of the value of the portfolio. So it is still "a leveraged portfolio."

Do you get what I'm saying, which is, rephrased to take account of what you're saying..

a) what's being reported on by Jason Zweig is not the same as 100% NTSX, it is noticeably less leverage;

b) "Jason Zweig thinks some portfolios using less than 1.5X leverage might have merit" is not at all the same as "the Wall Street Journal says leveraged portfolios are good for you?"

c) 1.33X leverage is "leverage," it's more than 1X--but less than 1.5X leverage and a lot less than 3X leverage.
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Re: WSJ: leveraged portfolios are good for you!

Post by Random Musings »

Nathan Drake wrote: Mon Nov 22, 2021 1:50 pm Hmmmm, levering up on the two most overvalued assets in the market at a time of rising inflation, what could go wrong?
A lot, unless margin use keeps continuing to climb to new historical highs. For leveraged investors, it's playing musical chairs with the twist that many or all the chairs will be removed at one time.

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Re: WSJ: leveraged portfolios are good for you!

Post by gtrplayer »

000 wrote: Sat Oct 16, 2021 6:46 pm
willthrill81 wrote: Sat Oct 16, 2021 5:59 pm
000 wrote: Sat Oct 16, 2021 5:48 pm
willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
So why are they kosher? Are only 2x and 3x funds evil now?
Either because they internally rebalance or my theory which is that Vanguard doesn't want to deal with the trading traffic of HFEA types on its brokerage platform which is a loss leader (no commissions, no PFOF) as well as the (low but non zero) potential for liability under the 'suitability' standard.
HFEA types do it “wrong” and hold leveraged funds longterm. They’re probably worried about the people using them “correctly” and day trading them.
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

gtrplayer wrote: Mon Nov 22, 2021 10:16 pm HFEA types do it “wrong” and hold leveraged funds longterm. They’re probably worried about the people using them “correctly” and day trading them.
Maybe, but Vanguard already has a solution in place to discourage day trading: its brokerage UI and CS.
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Re: WSJ: leveraged portfolios are good for you!

Post by typical.investor »

gtrplayer wrote: Mon Nov 22, 2021 10:16 pm
000 wrote: Sat Oct 16, 2021 6:46 pm
willthrill81 wrote: Sat Oct 16, 2021 5:59 pm
000 wrote: Sat Oct 16, 2021 5:48 pm
willthrill81 wrote: Fri Oct 15, 2021 1:34 pm But haven't you heard? Vanguard knows that leveraged funds are so evil that they won't allow intelligent adults to own them in a Vanguard account.
But haven't you heard you actually can buy NTSX and PSLDX in a Vanguard account? :wink:
So why are they kosher? Are only 2x and 3x funds evil now?
Either because they internally rebalance or my theory which is that Vanguard doesn't want to deal with the trading traffic of HFEA types on its brokerage platform which is a loss leader (no commissions, no PFOF) as well as the (low but non zero) potential for liability under the 'suitability' standard.
HFEA types do it “wrong” and hold leveraged funds longterm. They’re probably worried about the people using them “correctly” and day trading them.
Actually, 3X funds are different from NTSX in that returns for the 3X fund can be negative even when the underlying index is positive (and to be fair positive when the index is negative). The Equities portion of NTSX will equate the index. There is a difference there and even posters here despite being presented with theoretical and empirical data that the previous is true, insist it isn't true simply because that behavior hasn't been seen in funds' lifetime.

Just because a prolonged sideways market with high volatility hasn’t been seen, doesn’t mean it won’t be.

In other words, even those bothering to understand 3X funds too often fail to do so and Vanguard likely doesn't want to sell products that are so easily misunderstood.
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Re: WSJ: leveraged portfolios are good for you!

Post by 000 »

Good points, typical.investor, and that is a better explanation than mine. NTSX is not levered explicitly on stocks.
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Re: WSJ: leveraged portfolios are good for you!

Post by LFKB »

garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
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Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

LFKB wrote: Mon Nov 22, 2021 11:14 pm
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
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Re: WSJ: leveraged portfolios are good for you!

Post by gtrplayer »

LFKB wrote: Mon Nov 22, 2021 11:14 pm
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
They’re reset daily, so not necessarily. It’s 3x the daily return, so it could be 3x down one day, and then 3x up the next which does not get you back to even. Over time, this does not equal 3x the SP500, which is why some brokers warn you that they’re intended for day trading not long term holding.
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Re: WSJ: leveraged portfolios are good for you!

Post by gtrplayer »

gtrplayer wrote: Tue Nov 23, 2021 12:00 am
LFKB wrote: Mon Nov 22, 2021 11:14 pm
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
They’re reset daily, so not necessarily. UPRO is 3x the daily return, so it could be 3x down one day, and then 3x up the next which does not get you back to even. Over time, this does not equal 3x the SP500, which is why some brokers warn you that they’re intended for day trading not long term holding.
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

nisiprius wrote: Mon Nov 22, 2021 8:35 pm
skierincolorado wrote: Mon Nov 22, 2021 9:59 am1.5x leverage on 2/3 of the portfolio IS the same as 1.33x leverage on the whole portfolio, unless the other 1/3 is in cash.
OK, I get what you're saying, and I need to correct myself.

With 1.5X leverage on a portfolio, you're borrowing ½ of the value of the portfolio. With 1.5X leverage on ⅔ of the portfolio, you're borrowing ⅓ of the value of the portfolio. So it is still "a leveraged portfolio."

Do you get what I'm saying, which is, rephrased to take account of what you're saying..

a) what's being reported on by Jason Zweig is not the same as 100% NTSX, it is noticeably less leverage;

b) "Jason Zweig thinks some portfolios using less than 1.5X leverage might have merit" is not at all the same as "the Wall Street Journal says leveraged portfolios are good for you?"

c) 1.33X leverage is "leverage," it's more than 1X--but less than 1.5X leverage and a lot less than 3X leverage.
Agreed, but I think we should care a lot more about what Yale economists like Ayers and Nalebuff have demonstrated in peer reviewed literature regarding the use of 2x leverage in Lifecycle Investing, than what Zweig thinks.
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Re: WSJ: leveraged portfolios are good for you!

Post by Harry Livermore »

garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm
Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine.

Garland Whizzer
It's an excellent data point. When you start to hear everyone and his brother buying rental real estate, trading options, etc. and patting themselves on the back, it's a pretty good indication we're near the top of whatever asset class. Like the old "shoe shine boy giving out stock tips" trope.
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

LFKB wrote: Mon Nov 22, 2021 11:14 pm

Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
willthrill81 wrote: Mon Nov 22, 2021 11:27 pm
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
gtrplayer wrote: Tue Nov 23, 2021 12:00 am

They’re reset daily, so not necessarily. It’s 3x the daily return, so it could be 3x down one day, and then 3x up the next which does not get you back to even. Over time, this does not equal 3x the SP500, which is why some brokers warn you that they’re intended for day trading not long term holding.

3x funds have returned a lot more than 3x since 2009 from low volatility boost. Volatility decay/boost is an extra risk, but it works both directions. Since 2000, a 2x fund has returned nearly 2x pre-fees and pre-financing cost despite going through the 2001 crash, 2008 crash, and 2020 crash. If volatility decay were a consistent significant long-term phenomenon, it would be possible to arbitrage by shorting 3x funds and buying 3x more 1x funds. Over shorter periods you can get significant decay or boost, and even over longer periods you can get some but it's unlikely to be huge.
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Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

skierincolorado wrote: Tue Nov 23, 2021 9:12 am 3x funds have returned a lot more than 3x since 2009 from low volatility boost.
And if a frog had wings...

Since it's inception in 2006, SSO (a 2x S&P 500 fund) has returned 15.33% vs. 11.00% for VFIAX (1x S&P 500), a 39% boost in returns, not 100%. Ignoring the impact of bear markets, especially with this type of strategy, is perilous.

The two funds had nearly identical returns over the first 10 years of SSO, but the bear market of 2020 nearly equalized the funds' performance over the period. Nearly all of SSO's outperformance since 2006 has been since March of 2020.

Image

The extreme volatility of these leveraged ETFs is why many have suggested that they be 'counter-balanced' with other leveraged ETFs, as in HFEA. But even then, gut wrenching drawdowns should be expected on a fairly regular basis, at least every few years. Few investors are capable of holding a fund with an -81% drawdown, and that's certainly not the biggest drawdown that is possible.
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Re: WSJ: leveraged portfolios are good for you!

Post by David Jay »

willthrill81 wrote: Fri Oct 15, 2021 1:54 pm
tomsense76 wrote: Fri Oct 15, 2021 1:46 pm There's also a tendency for a bunch of products to come out right at the moment when a strategy stops working. So this is in the back of my mind as well.
Maybe, maybe not. Vanguard introduced their SCV fund (VISVX) in mid-1998, and it went on to smoke TSM over the next decade.
Perhaps you read the comment too quickly, because your reply is a logical fallacy.

One anecdote about a strategy that did not stop working says nothing whatsoever about strategies that stopped working and concurrently a bunch of products were launched implementing said strategy.
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

willthrill81 wrote: Tue Nov 23, 2021 9:54 am
skierincolorado wrote: Tue Nov 23, 2021 9:12 am 3x funds have returned a lot more than 3x since 2009 from low volatility boost.
And if a frog had wings...

Since it's inception in 2006, SSO (a 2x S&P 500 fund) has returned 15.33% vs. 11.00% for VFIAX (1x S&P 500), a 39% boost in returns, not 100%. Ignoring the impact of bear markets, especially with this type of strategy, is perilous.

The two funds had nearly identical returns over the first 10 years of SSO, but the bear market of 2020 nearly equalized the funds' performance over the period. Nearly all of SSO's outperformance since 2006 has been since March of 2020.

Image

The extreme volatility of these leveraged ETFs is why many have suggested that they be 'counter-balanced' with other leveraged ETFs, as in HFEA. But even then, gut wrenching drawdowns should be expected on a fairly regular basis, at least every few years. Few investors are capable of holding a fund with an -81% drawdown, and that's certainly not the biggest drawdown that is possible.
Keep in mind a lot of the poor performance is from the high fee not volatility decay. Since 2006 pre fees sso is 9.5x return over twice the 4.5x return of spy.

There’s also the financing cost. Pre finance cost it is likely up well over 12x nearly 3x spy. Since 2006 sso has seen low volatility boost.. the daily reset has helped. The problem with leverage is fees and financing costs, not volatility decay
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Re: WSJ: leveraged portfolios are good for you!

Post by nisiprius »

skierincolorado wrote: Tue Nov 23, 2021 8:49 am...Agreed, but I think we should care a lot more about what Yale economists like Ayers and Nalebuff have demonstrated in peer reviewed literature regarding the use of 2x leverage in Lifecycle Investing, than what Zweig thinks...
How about what an MIT economist like Paul Samuelson thought about Ayres and Nalebuff?

As cited by Bobcat2, with a longer extract and more context here,
In 2008, Paul Samuelson wrote:...The ideas that I have been criticizing do not shrivel up and die. They always come back... Recently I received an abstract for a paper in which a Yale economist and a Yale law school professor advise the world that when you are young and you have many years ahead of you, you should borrow heavily, invest in stocks on margin, and make a lot of money. I want to remind them, with a well-chosen counterexample: I always quote from Warren Buffett (that wise, wise man from Nebraska) that in order to succeed, you must first survive. People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game...
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Re: WSJ: leveraged portfolios are good for you!

Post by LFKB »

willthrill81 wrote: Mon Nov 22, 2021 11:27 pm
LFKB wrote: Mon Nov 22, 2021 11:14 pm
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
skierincolorado
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

nisiprius wrote: Tue Nov 23, 2021 11:42 am
skierincolorado wrote: Tue Nov 23, 2021 8:49 am...Agreed, but I think we should care a lot more about what Yale economists like Ayers and Nalebuff have demonstrated in peer reviewed literature regarding the use of 2x leverage in Lifecycle Investing, than what Zweig thinks...
How about what an MIT economist like Paul Samuelson thought about Ayres and Nalebuff?

As cited by Bobcat2, with a longer extract and more context here,
In 2008, Paul Samuelson wrote:...The ideas that I have been criticizing do not shrivel up and die. They always come back... Recently I received an abstract for a paper in which a Yale economist and a Yale law school professor advise the world that when you are young and you have many years ahead of you, you should borrow heavily, invest in stocks on margin, and make a lot of money. I want to remind them, with a well-chosen counterexample: I always quote from Warren Buffett (that wise, wise man from Nebraska) that in order to succeed, you must first survive. People who leverage heavily when they are very young do not realize that the sky is the limit of what they could lose and from that point on, they would be knocked out of the game...
Samuelson was like 97 when he wrote that and it is inconsistent with his earlier writings. Ayers and Nalebuff site Samuelson extensively, and unlike the paragraph you quoted their work is peer reviewed.
Last edited by skierincolorado on Tue Nov 23, 2021 12:00 pm, edited 1 time in total.
skierincolorado
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Re: WSJ: leveraged portfolios are good for you!

Post by skierincolorado »

LFKB wrote: Tue Nov 23, 2021 11:57 am
willthrill81 wrote: Mon Nov 22, 2021 11:27 pm
LFKB wrote: Mon Nov 22, 2021 11:14 pm
garlandwhizzer wrote: Fri Oct 15, 2021 1:06 pm Using leverage in portfolios typically becomes more popular in the later stages of a long bull market run when backtesting results shine. During severe bear markets and particularly when there are long running multi-year spells of underperformance associated with stagflation for example, the opposite happens. In periods like 1966 - 1982, "the death of equities" which was also the death of bonds especially long duration bonds is a case in point. Even risk embracing investors believe it is utter foolishness to leverage up the portfolio as both bonds and stocks continue to suffer long term. They are enthusiastic about the same strategy at times like now when we've had massive returns on both bonds and stocks for the last 17 years.

Whether a high leverage strategy is going to improve your risk adjusted returns depends less on backtesting data than on your ability to foresee the future in terms of inflation, Fed policy, macro-economic growth background, market valuations, global political, war, and environmental surprises, etc.. All strategies that aim to outperform a balanced portfolio carry the risk of underperformance including this one. Among outperformance strategies, however, I believe leverage of high quality assets like S&P 500 and Treasuries has a better expected risk/reward profile than most.

Personally non-leveraged market risk of my balanced but equity heavy portfolio offers a sufficient level of risk/reward tradeoff for my current taste. I have no problem with those non-risk averse individuals who choose to take on more risk in search of greater gains. I wish them good luck. It is important for them to be aware, however, that the the past 17 years of results is unlikely to replay going forward. The downside of leverage has been invisible for a long time until very recently. How well it will work in the future depends on a lot of inputs, none of which is accurately predictable up front, more so than impressive backtesting results.

Garland Whizzer
Well over the long term if an S&P 500 fund is good isn’t a 1.5x or 2.0x levered S&P fund better even if comes with a higher (but still reasonable) expense ratio?
Not necessarily. Volatility decay can wreck a fund that is reset daily, which all of these leveraged funds are, TMK.
Don't funds like SSO have a long history of this not being the case? It's been around for 15 years and looks to have done a pretty good job.
I don’t like Letf because of the high fees.. but yes pre fees they have done well. And we can simulate back over a century as well and they have done fine
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willthrill81
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Re: WSJ: leveraged portfolios are good for you!

Post by willthrill81 »

David Jay wrote: Tue Nov 23, 2021 10:12 am
willthrill81 wrote: Fri Oct 15, 2021 1:54 pm
tomsense76 wrote: Fri Oct 15, 2021 1:46 pm There's also a tendency for a bunch of products to come out right at the moment when a strategy stops working. So this is in the back of my mind as well.
Maybe, maybe not. Vanguard introduced their SCV fund (VISVX) in mid-1998, and it went on to smoke TSM over the next decade.
Perhaps you read the comment too quickly, because your reply is a logical fallacy.

One anecdote about a strategy that did not stop working says nothing whatsoever about strategies that stopped working and concurrently a bunch of products were launched implementing said strategy.
No fallacy here. I said maybe and maybe not and provided an example of when a strategy did not stop working once funds came out to target the strategy. Nothing more, nothing less.
The Sensible Steward
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