Past performance does not guarantee future returns. But in your last words you write : “Disclosures: I am long TMF, UPRO, UTSL, and VTI.” what do you mean with this and what percentages would you go with each of them ? Joe Marwood is an independent trader and the founder of Decoding Markets. Joe Marwood is an independent trader and investor specialising in financial market analysis and trading systems. An “All Weather Portfolio” could have been maintained throughout the 20th Century using stocks and lightly leveraged bonds to produce a return equivalent to pure stock market investment but at a fraction of the draw-down and volatility. The main questions are. To see some long-term leveraged ETF strategies in action, check out the Hedgefundie strategy and my designs of a leveraged All Weather Portfolio and leveraged Permanent Portfolio. I was previously achieving that rough backtest using a negative cash position to simulate borrowing. We found that, from 1996 through to 2018, the All Weather portfolio returned about 7.5% per year. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. I haven’t explored international (ex-US) diversification with leveraged funds and probably won’t, considering the potential tracking and liquidity issues of those particular ETF products at this time. THX for that great informations! How do you think about the purpose/function of intermediate bonds, vs doing 100% TLT or the long-term equivalent? Is this a valid concern? Aren’t Leveraged ETF’s Unsuitable for Holding Long-Term? We can all do it however we like. There’s no shortage of articles lambasting the idea of holding leveraged ETF’s for more than one day, reciting that they should “only be used for intraday trading.”. drag with margin. . It only took one highly unusual race at the Winter Olympics of 2002 for Australian Steven Bradbury to become a colloquial reference in modern day language. I had the same concerns though, so I actually updated the post using my own data series I created in an attempt to more accurately simulate how these leveraged ETFs – which are relatively new products – would have behaved historically. I mixed up the numbers. Or just re-balancing each quarter enough to adjust portfolio? There will be more risk, of course, from simply owning stocks. As you’ve seen, for a single ETF like UPRO in isolation, a steep drop would indeed be concerning because it would take longer to recover, but this is precisely why we’re diversifying across uncorrelated asset classes in this case to protect the downside and reduce volatility and risk, thereby attempting to replicate the strategy of the “regular” All Weather Portfolio while juicing returns. We’ll always need energy of some form, whether that’s solar, wind, natural gas, etc. Here’s a backtest going back to 2006 comparing the 2x All Weather above to the unleveraged All Weather Portfolio, a traditional 60/40 stocks/bonds portfolio, and the S&P 500 index: The 60/40 achieves the highest Sharpe but with much lower return than and a nearly identical Worst Year and Max Drawdown to the 2x All Weather. Past results do not indicate future performance. So, the trick is not which strategy you choose but how early you choose it and how regularly you contribute to it. Remember, the original All Weather Portfolio, while well-diversified, is not really based on real risk parity of the constituent assets, in which each asset is contributing in the same way to the portfolio’s overall volatility. But I would argue that if you’re wanting to mitigate volatility, you shouldn’t be deploying leverage in the first place. The fees alone for the gold and commodities may be a major drag on the strategies’ performance, with the trade-off being the extra diversification and subsequent drawdown protection and volatility reduction. Update April 2020: After Direxion’s changing GUSH from 3x to 2x effective March 31, 2020, I would consider using 3x Utilities, REITs, or Consumer Staples, accessed via UTSL, DRN, and NEED respectively. I wanted to ask how you backtested AW2x and AW3x back from 2006 or 2007 considering those ETFs were not around back then, especially the ones like UPRO, that would be down 95+% during the 2008 crash. Consistent with modern portfolio theory, we’re interested in how these assets contribute to the performance of the portfolio as a whole, not individually in isolation. Let me know what you think in the comments. I was just wondering, since I also never invested or traded a leverage ETFs, if it is really possible to hold for example UPRO for a longer period of time? Interested in more Lazy Portfolios? Commodities have been used in the past for their diversification benefit from their inherent low correlation to the total stock market, and the nature of the asset class being physical necessities on which futures are traded. See the full list here. Anyway, the original All Weather Portfolio was proposed by Ray Dalio for US Investors, and it looks like this: For the 30 year period from 1984 to 2013, this portfolio returned 9.7% annual returns, against 7.2% annual returns for a 35/65 stock/bond portfolio (47% in long-term treasuries, 18% in 10 year treasuries and 35% in the S&P 500). Below I explain why Utilities are probably the best choice, and I’ve included a pie link for that option. Hi John, Thanks for this article. Update June 22, 2020: With the recent market turmoil, Credit Suisse announced today that it plans to delist some of its 3x leveraged VelocityShares™ ETN’s, including UGLD. Technically, this is not the classic way to do a rebalance but it is effective in this situation and easier to code. Applying leverage to those same allocations gets you enhanced exposure to what is traditionally a low-risk, low-volatility portfolio. This will slightly change the allocations of the leveraged risk parity portfolio at the end of this post. I learnt a lot from this. The All Weather Portfolio is the right place to be, even in a rising interest rate environment. It’s for informational and recreational purposes only. Reply. Great article you got there. Joe Marwood is not a registered financial advisor or certified analyst. really grateful about the work you’ve done here. It is really interesting to see the portfolio’s returns juiced up through leverage. I never felt comfortable anyway with using the leveraged oil/gas ETF’s (DIG and GUSH) as a proxy for the prescribed “broad commodities.” I now believe an objectively superior approach would be to use Utilities in its place, in any portfolio. Of course, I also have capital reserved for short-term trading as well with the intention of boosting returns. I’ve sent you a Linkedin messagge PS: I suspect you’re the same Tyler from Portfoliocharts.Am I right ? 1. Skip to the next section to get the most recent updates and new backtests. Bonds won ’ t survive a decline such as we saw these breakers... Your own personal factors before diving into investing-related data and playing around with backtests, I also have capital for! Information provided a good, low risk approach to asset allocation of Ray Dalio ’ s something don..., from 1996 through to 2018, the Golden Butterfly portfolio to what is the right days extra reduction. 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