A.I.M. Users Bulletin Board

[ls7550]

With a 2x, half in 2x, half in bonds, generally rebalancing once/year is sufficient to maintain reasonable tracking of 100% 1x https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_1=50&symbol1=SSO&endYear=2015&symbol3=SPY&symbol2=BND&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=50&allocation3_2=100&annualOperation=0&initialAmount=10000

With a 3x leveraged ETF you need to rebalance more frequently, third in 3x, two thirds bonds, rebalance once every 6 months. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_1=66.7&symbol1=UDOW&endYear=2015&symbol3=DIA&symbol2=BND&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=2&annualPercentage=0.0&allocation1_1=33.3&allocation3_2=100&annualOperation=0&initialAmount=10000

With XIV you need to rebalance even more frequently, 20% XIV, 80% bonds, rebalance every quarter or maybe even every other month. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_1=80&symbol1=XIV&endYear=2015&symbol3=SPY&symbol2=BND&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=3&annualPercentage=0.0&allocation1_1=20&allocation3_2=100&annualOperation=0&initialAmount=10000


One of the measures I like to make is to see what bonds would have had to earn for the leveraged ETF to compare to the 1x. i.e. take the yearly 2x gain, divide by two to reflect 50% allocation and deduct that from what the 1x index gained over the year. Finally multiplying that by two to determine what the 50% bonds would have had to earn for the 50/50 2x/bonds to compare to the 1x.

If you run those figures for each and every month there tends to be volatility in the values. Averaged however and that average provides a broader indication of what bonds would have had to earn.

I'm quite fond of 40% stock, 30% gold, 30% hard cash as a form of 'bond' holding. Leveraged up (so no hard cash) that's close to 60/40 stock/gold. Using that as bonds and allocating 50% and the other half in 2x is a moderately leveraged long stock equivalent. De-leveraging that down to around 66% brings the gains/characteristics back more in line with 100% 1x risk/reward i.e. something like https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=34&allocation2_1=13&symbol4=SHY&symbol1=SSO&endYear=2015&symbol3=SPY&symbol2=GLD&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=33&allocation3_2=100&allocation3_1=20&annualOperation=0&initialAmount=10000 that holds 34% in cash (SHY).

i.e. whilst I use leveraged ETF's a lot, I tend to avoid leverage and instead seek out similar risk/reward to the 1x by de-leveraging leveraged positions. I then focus on bolstering the bond gains and/or holding positions in a more tax efficient manner.

Scaling up leverage after price declines is OK if that's your preference, but personally I prefer to just realign to the equivalent of being 100% long rather than shifting to being perhaps 120% long. I focus more on the bond side of things - that includes combinations of stocks, gold, long dated and short dated treasury bonds etc. that are collectively considered to be 'bond'. A good aspect of a diverse range of 'bond' assets is that you can select whichever is the better valued to trade at the time. If stocks are down, a rebalance occurs and long dated bonds are up then reducing those 'bonds' is an appropriate choice at that time. In other cases it might have been more appropriate to reduce gold (gold up as stocks down).