>For example, if we purchased a 2x bull leveraged S&P 500 ETF such as SSO, we would choose an appropriate weight to cancel out the leverage, 0.5 in this case. If we kept the rest of the money in cash, the return of the portfolio would only be slightly worse than that of the S&P 500, due to the 0.90% expense ratio we pay.
A 2x bull leveraged etf replicates daily moves. your long term return to expense expectations are completely off.
> I do not understand how leverage will be beneficial.
Same here, if I understood the grandparent they were saying you lose 0.04% on every trade (from spread) and "in a year" that is 10% (250 trades?).
If you have a strategy that has expected returns of x bips per trade then you make an expected x-4 and with leverage 4 * (x - 4). Both have the same "sign", so if x-4 is expected positive, leverage just makes it higher risk-reward.
In fact with leverage you also have to pay interest on the loan, which seems to be at least ~18 bips (or 3/4 of that since the returns are on 4 * cash and interest is on 3 * cash) for a single day loan (far exceeding the "spread cost"):
https://www.schwab.com/public/schwab/investing/accounts_prod...
It seems the only way leverage would help is if there were fixed costs to trading (which I assume there are but the GP does not mention).
>This is one thing most people don't understand. If someone is selling you a financial instrument with >6-7% annual returns, it's as ridiculous as someone selling you a time machine or the cure to death.
A 2X leverage ETF would have double that rate of return, minus the overhead and interest on the leverage. Of course, it would also have double the losses in down years. With enough leverage, you can "easily" create arbitrary levels of annual returns, just by increasing risk.
> Investing 50/50 in S&P and Bizarro-S&P, substantially improves the amount of return you can access for the same risk.
I can see how this would lower the volatility of your portfolio. But how do you improve the return in this scenario?
> This is the same reason that a 60/40 stock-bond portfolio has massively outperformed 100% stocks historically
How is this possible? If I invest 100% in stocks, my return after 10 years is higher than 60/40 stock-bond. So why do you say the latter outperforms it?
> The persistent low-interest era meant lack of investment opportunities
Is that true?
Just putting your money on an index fund like S&P would've yielded you an average 14.5% per year in the last decade or an almost 400 % return in a decade.
Stock market more than doubled in the last 5 years and it highly outperformed crypto markets.
There has been no shortage of investment opportunities, but you people sound simply...looking for highly volatile quick gains.
I did some backtesting simulations that made leveraged investing look pretty awesome. The effective borrow rate for funds like spxl is crazy low, way better than if I were to borrow myself. (Also, fwiw I was pretty conservative and am overall only around 2x-leveraged.)
The internet is very opposed to leveraged investing imo, but I think most of the concerns are pretty dumb. There was this one blog post where this guy ran ten simulations of his own, most of which showed the leveraged portfolio doing comparably to the baseline, but one a couple showed it doing worse and one saw the leveraged portfolio 100x'ing or something... and he concluded that it wasn't worth it??
People will also appeal to volatility drag as a superficially sophisticated knockdown (in short, imagine all four two-step paths in which the market goes up or down by 10% at each step. Then the baseline market averages out to (.81 + .99 + .99 + 1.21)/4 = 1, and a 3x leveraged portfolio averages out to (.49 + .91 + .91 + 1.69)/4 = 1. Volatility drag is those two middle worlds where the leveraged portfolio does badly despite the market as a whole basically ending up where it started.
> if every individual investor bought the S&P with leverage
You could also go broke! (or at least significantly underperform historical averages.) Sure, you can make higher returns by taking more risk. That's not most people's tolerance in a retirement portfolio.
There are plenty of other ways to diversify besides a 60-40 portfolio that are a lot lower risk.
> depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years)
Sorry, but unless you're talking about truly black swan circumstances like the Great Depression or the 2008 crash, I don't believe for a second that, over a 15 year timespan, holding the S&P will result in negative returns frequently enough that a typical investor has to concern themselves with market timing.
You need to prove your work for a statement that strong.
9% pre inflation is insane, and 7% is too. If you can do that consistenly, you will be a billionaire hedge fund manager. Ten year treasury bond yields 2.59% per year, anything above it is risky.
Sure, you can stuff 100% of your savings into S&P500, but then you will have to deal with unpredictable 20-40% drawbacks, which take years and years to correct. Last recession S&P500 basically halved.
> Historically, the stock market would return 10% YoY (after averaging out). The problem is that that number has dropped.
What do you mean? The current market has many problems but recent returns being low is not one of them (of course returns going forward are something else entirely).
S&P 500 total returns (annualized) are:
17% over the last one and two years
13% over the last three and five years
11% over the last ten years
9% over the last eleven years (roughly corresponding to the peak of the previous bull market)
> The point is that risk = higher return is an oversimplification. What that risk means is a significant chance of a much lower return.
Well yes. This is exactly why higher risk generates higher EV in an efficient market. Because of the significant chance of lower returns.
> So if a basket of risky assets predictably overperforms... it isn’t actually that risky
Depends on your time horizon. The S&P 500 predictably generates higher returns than T-Bills, over a 100-year time horizon. But it is still very risky to a 70 year old retired pensioner. This risk is why the S&P 500 generates higher average returns than T-Bills
There are 30 year periods where US stocks (spy 500 or a close proxy thereof) posted a negative total return. Are you prepared for that?
My larger point is that 12-15% return assumption is absurd. There are very few long-term periods where that has ever been achieved in the US market, most (but not all) of which were followed by a deep and long-lasting correction.
The alternative is to assume a lower return like 5% and plan accordingly.
> I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time.
I would not be surprised to see equities doing worse than -10%. Sometimes there are no good investments, only loss mitigation, and cash is not necessarily a bad idea.
> However, is 3x too high for the long term? I dunno, but over long time periods, a pure 3x leveraged spy portfolio is going to outperform significantly. The problem is most people will be unable to weather the storm as you can easily lose half of your money in a week.
You don't define "long time periods" but the storm may be much longer than one week.
If you had invested with 3x leverage (daily rebalanced) in the S&P 500 anytime in 1999 or 2000 you would have been down over 90% in 2009 and you wouldn't have broken even until 2014 or 2016.
> I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways.
Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?
Could you explain your line of thought (or back of the envelope math)?
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