Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Data looks to be sourced from Robert Shiller's http://www.econ.yale.edu/~shiller/data.htm
IIRC his data are averages i.e. year average to year average for yearly values. He also provides monthly (averages).
Hi K
A AIM-HI (20% cash) applied to a 1.25 times actual total investment, with Vealie set at 66% will span 82.5% to 125% stock exposure, that might generally be expected to provide comparable reward to 100% stock buy and hold, but utilise some gearing at times when prices have declined, de-gear when prices are relatively high - that potentially bolsters rewards.
If 2x fund is used for stock exposure, loaded with half the amount that would have been invested in a 1x then that will entail between 40% and 62% exposure to such a 2x fund. With 38% of total in effect always in 'cash' that cash can be invested longer term for higher reward i.e. longer dated treasury - that likely exceeds the cost of short term borrowing (as incurred by leveraged etf's). With the remainder of cash split between short term treasury and gold then when it comes to deploy 'cash' you have the choice between selling some short term treasury, gold or long dated treasury in order to add more stock exposure. One of those will have moved more opposite direction to stocks (risen).
Without AIM, something like
With AIM scaling up and down gearing/exposure (buying dips, scaling back when prices are relatively high), even better results might reasonably be expected to be achieved.
UK treasury issues have one if not the longest duration (average term). Most countries/states have issued massive amounts of debt (sold treasury bonds), with much shorter duration (average term) and at low cost (interest rates). Which is fine until such debt matures and either has to be rolled or repaid. If interest rates are higher at that time then the rolled debt will cost a lot more - which is ok if the state is running a surplus, not so good if running a deficit. The UK has been targeting reduction of the structural debt, so as to give it the flexibility/security of rolling/repaying, but that looks like it might be pushed back to 2020. Generally (globally) low rates look set to sustain for longer yet (until 2020 or beyond) IMO. With relatively low yields long dated treasury tend to be more volatile as even small moves can mean big swings in price (log scaled).
Historically when on the gold standard there used to be around equal measure of inflation and deflation - but large interim swings (volatility). Since President Nixon days (1968) we've more or less only seen inflation and a unwillingness (due to taxation policies) to allow deflation. That deflation resistance is a fundamental factor in my belief that low yields will persist for quite some time.
A risk factor is that sovereign wealth funds that have ballooned massively could decide to shut up shop (sell) 'ahead of the crowd' and I suspect we've been seeing some of that more recently. The UK hasn't participated in such Sovereign wealth fund type speculation (UK/Pound has recently been identified as one of the most stable/safe western economies). Much of the rest of Europe/Euro is pretty much of a basket case - not protecting its borders (migration from Asia/Africa) and multiple economic disconnections (one (interest) rate to fit all isn't working - quite the converse).
Another risk factor (rapidly rising yields) is that sentiment in the UK is quite high towards favouring a BREXIT (UK leaving the EU) and the EU has offered next to nothing to prevent that. In the event of the UK voting to leave, being just one of a few net contributors to the EU, could see the UK becoming even more of a safe haven as the EU declines into further turmoil.
China's throwing out metal/steel at below cost. Oil storage tanks are filled to capacity and Iran are now back in the market (and selling oil cheaply hurts the Saudis which whom they have issues). Job and wages indicate no sign of inflation. Difficult to see where any growth might come from that might drive inflation/yields higher. The exception will be more individual cases - states like Greece.
I suspect that Yellen will talk the talk about the next interest rate rise being soon - only to see repeated deferrals and perhaps no increase until 2017. 2% is the preferred choice under inflation based taxation policy, but in the absence of that taxation via other means will have to suffice. Watching some of Bernie Sanders vs Hillary Clinton debate the other night and it sounds like both are in favour of implementing some kind of wealth tax - both seemed to suggest a $250,000 start point band - but if that applies to total wealth then for many that might be eaten up by home value alone and that ignores that most states opt to avoid such taxation due to the negatives https://en.wikipedia.org/wiki/Wealth_tax#Disadvantages That said and I see there are record number of American's who live/work abroad resigning their citizenship due to FATCA (having to pay tax twice, once to their resident state and then also to the US). Tax evasion and drug/terrorism 'concerns' have enabled states to impose much tighter regimes - and when the state knows exactly where you are (CCTV/credit card spending/cell phone), how much you have coming in/going out and where your wealth is stored then your freedom is significantly impacted (state can 'confiscate' at will as/when/where it sees fit to do so).
Interesting times.
PS by the way of example, for a barbell of 20 year 2% Treasury where the market reprices longer term (20 year) yields to 4% a investor will take a hit of around -14% loss against that barbell (short dated/long dated (20 year) around equal amounts of both), excluding interest (perhaps -12% after interest is included). The interim fluctuations/trading can more than compensate for such a hit. And there's always the potential that the hit may be seen coming on the horizon and side-stepped. Since the start of the new year whilst stocks were down around -12% so long dated treasury were up +12%, which means that the stock purchase power of long dated treasury bonds have risen by approaching 30% since the start of the year (a similar amount to the gain in the stock purchase power of gold). Some each of cash (short term bonds), longer dated treasury and gold collectively as 'AIM CASH' provides the opportunity to sell/reduce whichever is the relatively best performer when AIM is indicating to add to stocks (more recently that would be either longer dated treasury and/or gold). Selling one asset that is up +10% to buy another that is down -10% obviously is better than selling one that is unchanged 0% to buy another that is down -10%. More so if later the situation is entirely reversed.
TOM
NPTPASS.XPT Username and password file
===========
The in built Password for NewPort is "BOB&DAVE" without the quotes.
If you're ambitious you can change the name shown in
the REGISTERED USER : field via reference to the following
First field (encased in quotes) is constructed using codes
06 For A
19 for B
12 C
09 D
11 E
21 F
01 G
14 H
08 I
10 J
05 K
16 L
07 M
13 N
22 O
02 P
17 Q
04 R
26 S
18 T
15 U
23 V
28 W
20 X
27 Y
03 Z
24 " " (SPACE CHARACTER)
25 .
32 0
36 1
29 2
31 3
37 4
35 5
38 6
33 7
34 8
30 9
39 '
Example if name is BOB SMITH
then first field is "192219242607081814"
as using the above code table
The last field is then the first 2 chars of the first fields
step 6 read next 2 chars from that point, step 6 read next 2 etc
up to a maximum of 26 chars. This is used to confirm the
password (a form of checksum)
the third field in this example is
position 1 of the first field for 2 = 19
position 7 of the first field for 2 = 24
position 13 of the first field for 2 = 08
The second field in nptpass.xpt is the users password, created
using the code table
If set to
"2424242424242424242424","","24242424"
then the username and password are blank
All part of the industry. Out of a bunch of mechanical stock selection methods use the ones that have provided the most historically as a sales pitch for 'average' historic stock gains (Dow and Jones for instance devised three indexes, the best of which has been adapted and transformed into what many now refer to as being the historic average). Had all three indexes been equal weighted initially then that collective set might have lagged the best case by around 2%. Instead of 10% for the best case, 8% for the average case.
Ignore the costs of inflation (loss of purchase power), as historically that knocked nominal gains down by around 4%.
Ignore the cost of taxes/fees. Which might eat perhaps around 20% to 35% out of nominal gains. Even if nominal gains just paced inflation, you're still taxed on that 'gain'.
Encourage investors to profit chase and trade - to buy when high and rising, sell when fallbacks/low. Such trading can eat around 2%.
Collectively that can be sold as a 'look - historically stocks have provided 10% nominal gains' and some might even include the effects of inflation and add '...and after 4% inflation that left you with 6% real gains'. Knowing that for the average punter their actual outcome will be significantly less - perhaps not even keeping up with inflation. Their loss is someone else's gain.
If instead you use a diverse range of low cost, tax efficient choices as your candidate holdings, and add-low/reduce-high trade (AIM), then you're more on the other side of the fence ... and more inclined to actually achieve the sales pitch "average" in practice. Others however might look at that and say '..well you only just paced the average anyway so I can't be bothered with that ... I've been sold this product that is expected to do better' .... You can lead a horse to water .....
2nd that. Thanks JD for your efforts each week throughout the year. Merry Xmas to you and yours.
Warm here in London also Tom. Cold front is out to the east (Atlantic) and we're in a southern expansion warm zone. Ten+ degrees above seasonal average. Hope you and your family have a good Christmas.
Since the 2008/9 crisis I've increasingly thought more about relativity. The cash purchase power of stock (inverted AIM) is a good one IMO. 'Buy' more cash when the stock purchase power of cash is high, reduce when the stock purchase power of cash declines. Never exhausting that potential, as in how conventional AIM never exhausts stock to sell.
Looking back historically many suggest that stocks have performed very well in real (CPI inflation adjusted terms). With technology however CPI has tended to be low/slow, relatively lagged so-to-speak. A robot running 24/7 is more productive than a factory full of manual workers. Relative to house prices and the stock purchase power of housing has been more aligned i.e. in real house purchase power terms stocks have faired less well relatively than is implied by the real (CPI) indicated figures.
Robert Lichello said that you could apply AIM to other things, gold etc. and applying AIM to the stock purchase power of cash is one such variation.
Many investors in stocks have been led up a path. Historical figures indicating that they were making a wise choice. Discount costs, taxes, relativity, survivorship and human behaviour and actual rewards are much lower than what historical published figures suggest. Many are lucky to even maintain the lower CPI based net real outcome after all factors are considered. The Dow (Industrial) for example is oft cited as a example of historic rewards, yet Dow and Jones devised three indexes, Dow Industrial, Transport and Utilities. The best of those (that couldn't have been predicted in advance) is however more commonly now used as a reference of historic 'average' investment reward.
AIM is great for helping avoid the human emotional based cost. Selling low, buying high. Index funds help with avoiding survivorship costs. Minimising cost and taxes yet further helps. The inverted AIM approach would appear to complete the picture. Collectively positioning you to more likely better the average (other investors) after all factors are considered.
Hi LC
Hi Toofuzzy
Hi Tom.
I've been looking to reinvest $10K of accumulated CHY dividends as the total return has somewhat zagged. Hoping for a 12% yield on reinvested
Blue line CHY Total Return, Red Line SPY total return. Courtesy of https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation2_2=100&symbol1=CHY&endYear=2015&symbol2=SPY&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=100&annualOperation=0&initialAmount=10000
Best. Clive.
Hi Tom
With the 40,000 grub on the horizon, what would the prize have been to have grabbed that on your Birthday.
Belated birthday best wishes.
Clive.
Doesn't time fly. For a newborn a year is a eternity. For a one year old a year is a lifetime. At our age a year passes so quickly - in less than 2% of a lifetime.
Ocroft's choice is a good enhancement IMO. Take for instance SSO/SHY 50/50. If you monthly monitor the weightings and virtually rebalance using midway rebalancing when 10% adrift from the mid value level, but only trade those amounts the month after a trade is no longer being indicated, actually trading the total sum of all sequential virtual trades prior to that month, then that can add value. Across the 2008/9 dip for instance from end of September 2008 for the next 6 months trades were sequentially indicated (paper version rebalance), at the end of March 2009 no more paper trades were indicated, at which point a actual trade was made to the $ value of all of those prior six paper trade amounts. Which had the effect of slowing the losses, and subsequently bolstered the upside (added 2.5% annualised to gains from January 2007 to end of July 2015 (8.5% versus 6%)).
By midway rebalancing for the paper version I simply mean :
( ( portfolio_value / 2 ) - current_stock_value ) / ( portfolio_value / 2 )
and if that's >10% or <-10% then trade
( ( portfolio_value / 2 ) - stock_value ) / 2
i.e midway rebalancing rather than full rebalancing (if stock were at 6000, cash at 4000 and full rebalancing was back to 5000 each, midway rebalancing instead rebalances to 5500/4500 stock/cash.
More often on the sell side you just get the single trade one month, no trade the next on the paper version, which means that the actual trade occurs the month after the paper traded version. For the downside however when hard and fast declines occur you accumulate all of a series of trades into one larger (and potentially lower priced) trade.
As sells (price rises) tend to be slower/more progressive that dives, a variation is to just treat sells as normal (trade each and every one as they occur) and just delay/accumulate potential sequential paper trades on the downside moves. Since 2007 that made relatively little difference though, around 0.1% added to annualised (8.6%). Personally I like the idea of potentially also accumulating several paper trades into one larger actual trade somewhere just past the peak so I use "ocroft's" for both sides.
Another variation is to scale up (or down) the amounts traded. Making larger trades can bolster rewards by a couple of percent added to annualised gains when using 1.5 times scaling of the indicated traded amounts, at least since 2007. In practice that's too aggressive for me personally.
AIM like, but not AIM. AIM is great at getting you to trade correctly. Many investors will by nature do the complete opposite, sell out when prices have dropped, buy back in again when stocks have/are doing well, such inappropriate trading knocks down rewards considerably. With AIM you're more inclined to do the opposite (better case). But once you get familiar with such character/trading you can AIM without using AIM (buy low/sell high). AIM teaches you to fish rather than feeding you a fish for a day.
Regards. Clive.
Hi Jaiml
XIV has similar qualities to a 5x long stock, blend that 50/50 with SPXL 3x long stock and you have a 4x average. Weight those two 25% combined and 25% in each of TLT, GLD, SHY - which are a collective 'bond' type holding and you more or less have a 100% long stock equivalent https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=25&allocation2_1=12.5&symbol5=GLD&symbol4=SHY&symbol6=SPY&allocation6_2=100&symbol1=XIV&endYear=2015&symbol3=TLT&symbol2=SPXL&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=12.5&allocation5_1=25&allocation3_1=25&annualOperation=0&initialAmount=10000
Leveraging up TLT, GLD, short term treasury is nigh on just borrowing to cover a average reward that compares to the cost of borrowing. A bit like being long and short comparable amounts and of little benefit IMO.
A primary benefit of leverage at least for me is that synthetic long stock positions can be created more tax efficiently - lower dividends so lower withholding taxes. And the greater capacity to work the bond side of things to potentially bolster rewards.
40/30/30 stocks/gold/hard cash can be broadly 'bond' like. Leverage that up and its around 60/40 stock/gold. With some reiterative mapping you can get to a low/no dividend position such as https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=45&allocation2_1=40&symbol4=GLD&symbol1=XIV&endYear=2015&symbol3=SPY&symbol2=SPXL&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=15&allocation3_2=100&annualOperation=0&initialAmount=10000 or when added to the chart you posted https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_2=33.34&allocation2_1=33.33&symbol5=TLT&allocation6_3=45&symbol4=SPY&symbol7=XIV&symbol6=GLD&allocation6_2=33.33&symbol1=SPXL&endYear=2015&symbol3=UGLD&symbol2=TMF&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=2012&rebalanceType=0&annualPercentage=0.0&allocation1_1=33.34&allocation1_3=40&allocation3_1=33.33&allocation7_3=15&allocation5_2=33.33&annualOperation=0&initialAmount=10000
Or de-leveraged (50/50 with SHY) https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_2=33.34&allocation2_1=33.33&symbol5=TLT&allocation6_3=22.5&symbol4=SPY&symbol7=XIV&symbol6=GLD&allocation6_2=33.33&symbol1=SPXL&endYear=2015&symbol3=UGLD&allocation8_3=50&symbol2=TMF&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=2012&symbol8=SHY&rebalanceType=0&annualPercentage=0.0&allocation1_1=33.34&allocation1_3=20&allocation3_1=33.33&allocation7_3=7.5&allocation5_2=33.33&annualOperation=0&initialAmount=10000
or delevraged further to 66% cash (SHY) https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_2=100&symbol5=TLT&allocation8_1=66&symbol4=SPY&allocation6_1=15&symbol7=XIV&symbol6=GLD&symbol1=SPXL&endYear=2015&symbol3=UGLD&symbol2=TMF&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=2012&symbol8=SHY&rebalanceType=0&annualPercentage=0.0&allocation1_1=13&allocation7_1=6&annualOperation=0&initialAmount=10000
Generally that's potentially 1x stock like downside or maybe less, multiple scale of stock on the way up, IF AIM's timing/rebalancing proves to have been good/reasonable. Should AIM's timing be off then downside declines could be very deep. Personally I strive to avoid leveraging up beyond the equivalent of 100% stock and as such use leveraged ETF's or equivalents more simply to reduce taxes that I'd otherwise have had to pay. i.e. I tend to go more with the last of the above charts/links, where 'bonds' are domestic bonds (cheaper/more tax efficient).
Clive
A risk factor for me is taxflation. I have enough in bonds to cover x years of spending, the rest is in growth (stocks). Ideally those bonds (drawdown/spent over time) need to pace inflation after costs and taxes so that they preserve purchase power. They also need to be safe. Lending to the state (buying treasury bonds) has the benefit that the state can always print money or raise taxes rather than default. Bond interest however can be taxed, with taxes being paid on what amounts to inflationary uplift. 10% inflation, 10% bond yield, 20% tax on nominal 'gain' and the bonds have lost 2% purchase power. To reduce/eliminate that risk I like bonds being in tax efficient accounts/options.
For the growth/stock side, dividend/income is just being reinvested. As dividends reinvested is less tax efficient than no dividends just capital growth I seek to minimise such dividend tax risk. Something like 50% 2MCL (FT250 2x ETF that is a fully collateralised total FT250 gain swap that pays no dividends) as the 2x stock, combined with 50% split 60/40 between BRK-B and gold, neither of which pay dividends, that collectively helps reduce/eliminate dividend tax risk whilst potentially providing comparable or even better rewards than had 100% long stock (FT250 1x ETF) been held.
With that 2 basket approach (bonds basket for drawdown, stock basket for growth) then if started with 50/50 in both of the baskets and bonds are spent over 20 years whilst stocks accumulate over 20 years then there's a reasonable chance that the stock value at the end of 20 years is the same or more than the inflation adjusted total 100% start date amount (longevity/heirs covered). Which is the same as a safe 2.5% inflation adjusted withdrawal rate, starting at 50/50 stock/bonds, ending at 100/0 stock/bonds, average 20 year 75/25 stock/bonds. With the added benefit that if stocks do perform well then they might be profit taken periodically to supplement income (unexpected spending). The relative expansion of stocks over time (50 start, 100 end, 75 average) is also akin to having (cost) averaged into stocks over time.
Having sufficient 'safe' bonds to cover spending requirements is a great comfort as you know that your 'wage' is (relatively) safe, stable and regular.
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).
Re VIXY
Hi Steve.
Long VIX is akin to being short stocks in my book. Fine when share prices are heading south fast, not so good as a long term holding (decay). Its also like a highly leveraged position, I broadly assume being equivalent to a 5x leveraged position and revise exposure accordingly (1/5th scale, so $10,000 instead of $50,000 that might otherwise have been invested in 1x (stock)).
I personally avoid long volatility and hold the opposing side (short volatility) i.e. XIV as that captures contango benefits and has a broader upward reward expectancy over time.
Something along the lines of 40% stock, 30% gold, 30% hard cash is somewhat 'bond' like. XIV is somewhat 5x long stock like. So a synthetic 1x long stock might be held as 20% XIV (being somewhat 5x long stock like), 80% bonds. If bonds are held as 40/30/30 stock/gold/nowt then overall 20% XIV, 32% SPY, 24% gold, rest in cash (SHY). Which since 2011 produced a 14% annualised compared to 14.1% for SPY (total gains/dividends reinvested).
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=24&allocation2_1=32&allocation2_2=100&symbol4=SHY&symbol1=XIV&endYear=2015&symbol3=GLD&symbol2=SPY&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=20&allocation3_1=24&annualOperation=0&initialAmount=10000
In short, take care with VIX Steve, playing with fire is ok provided you know what you're doing and take the appropriate precautions (think of a number and divide it by 5).
Best regards.
Clive.
PS on a personal note, I prefer to swap out SPY that pays dividends for BRK-B that doesn't pay dividends https://www.portfoliovisualizer.com/backtest-portfolio?s=y&allocation4_1=24&allocation2_2=100&symbol5=BRK-B&symbol4=SHY&symbol1=XIV&endYear=2015&symbol3=GLD&symbol2=SPY&inflationAdjusted=true&annualAdjustment=0&showYield=false&startYear=1985&rebalanceType=1&annualPercentage=0.0&allocation1_1=20&allocation5_1=32&allocation3_1=24&annualOperation=0&initialAmount=10000 A combination of XIV, BRK-B and Gold, each/all of which don't pay dividends side steps any US dividend withholding tax (15% for a UK investor). So instead of a S&P500 fund that charges perhaps a 0.1% management fee, and a 2% dividend http://www.multpl.com/s-p-500-dividend-yield/ that has 15% withholding taxes applied (0.3%) for a combined 0.4% 'overhead', its more cost/tax efficient to use synthetics. Synthetics can also mean holding some domestic bonds, and working those bonds to yield a above average bond reward helps bolster overall synthetic stock total gain/reward.
CHY 10% dividend yield
I bought into CHY during the 2009 lows when the dividend yield was in double digits, later sold after a 40% or so price appreciation. Back in again recently as the 10% dividend yield has its appeal.
I appreciate its a partial return of capital, but it seems to continue to do the business. CHY was one of Tom's (major) holdings for income some years back - that was the spark for me to buy some for myself.
Clive.
I've seen little in the way of dividend yield being a indicator of relative outperformance. Kenneth French's data since the 1920's indicates that equal weighted non dividend total returns were broadly near identical to equal weighted high dividend yield total returns. French/Fama do not define dividend yield as a 'factor' of total stock gains.
Equal weighted high book to market (price) historically were one if not the best Value indicators, a set that can include both non dividend and high dividend yield stocks.
When a stock pays a dividend on average its share price declines by the amount of dividend paid on the ex-dividend date i.e. market cap drops by the total amount of dividend paid. You can synthesise a dividend out of a stock that pays no dividends simply by selling some shares.
Conventional dividends tend to be paid on a regular basis and firms strive to keep the dividend the same or increase them - no matter if the share price is up or down at the time as a regular/stable dividend is what many firms believe investors desire. Which is comparable to selling some stock monthly, quarterly, bi-yearly ... or whatever the chosen dividend frequency. Totally un-AIM like as selling some shares (or distributing some of market-cap/firms-value) when share prices have declined/are low isn't what AIM does. Instead AIM 'distributes dividends' (synthetic) when prices have risen, and adds when prices are down.
The other factor with dividends is that they can trigger cost and tax events rather than defer taxes to whenever shares are eventually sold. Buffett considers the difference to be a form of zero cost loan from the taxman.
Personally I strive to avoid dividends as much as possible as I use stocks for growth and have bonds for drawdown. I want my bonds to pace inflation as much as possible in order to maintain future real purchase (spending) power. If stocks pay dividends then that increases bond risk as taxes paid on bond interest can be higher. Accordingly I'm more inclined than most to using the likes of half in 2x leveraged ETF to level exposure to 1x, total return swaps, shorting volatility...etc as forms of 'stock' exposure as the total gains are similar but dividends are lower/non existent.
Broadly stocks that pay higher dividends see slower share price growth and hence dividend value growth than stocks that pay lower/no dividends.
The thing to avoid with non/low dividend is cap weighting such holdings. Its broadly vastly better to equal weight such stocks. Cap weighting is just a tilt, a prediction that one stock will grow faster/more than another and often such predictions turn out to be wrong.
Clive.
Buffett likes to keep 10% in reserves (cash i.e. T-Bills) for buying opportunities as/when they arise.
You have to accept lower rewards from such cash for the required liquidity as/when such opportunities present themselves as they may be short lived events. Fixed (locked) term Bonds despite paying a little more may prevent you from being able to access/deploy such funds when appropriate (instant access is more preferable).
A factor to consider is that that 17% annualised is over the dip period (9.2 years). In practice such dips come along at a rate of around once every 20 years or so, 1970's, late 1990's, near 2010 etc. If for the next 10.8 years SHY just earns its 2.4% post 2006 average then the 4.25 gain factor across the dip compounded with 'just cash' for 10 odd years works out at around a 9% annualised over the 20 year 'full cycle'. Still not bad considering the large proportion of time (low risk) of being heavily/fully in 'cash' for most of the 20 year period.
TooFuzzy
since you both commonly use nomé de AIMs
Mine LS7550 dates back years : Long/Short 75/50 - in reflection of Alfred Winslow Jones http://www.awjones.com/ one if not the first hedge fund managers.
RE: LETF
With SSO scaled to 1x exposure i.e. half in SSO, half in bonds, those weightings will quickly deviate. If prices rise the you move to 51/49, 52/48 ... etc and vice versa if prices decline. That amplifies the upside, attenuates the downside. Hence if stocks drop 33% a 3x wont have lost 100% but something less.
You can deduce the effective borrowing rate by setting a period, say a year, and then calculate half the 2x change over that period and compare to 100% 1x change. Twice the difference is the amount that the 50% bonds allocation would have to make to close the gap. For one year long periods calculated for each and every day you'll see that that varies quite widely (could be +20% or more at times, -20% at other times, and more usually is high when volatility is high), but broadly averaged around 2% since 2008. For shorter periods, calendar months and the deviation is less and the amount was smaller (0.277%) which pro-rata to 12 months also = 2.8%. i.e. broadly since 2008 if your bonds averaged more than say 3% then overall LETF/Bonds produced a higher reward than SPY. Another way to potentially bolster rewards is through choice of rebalance timing.
Fundamentally you want to rebalance on a dynamic basis rather than at set intervals and the closer you can get the rebalance timing close to peaks and trough so much the better. AIM tends to do a relatively OK job of such indications.
For bonds you want some liquid, ready to be deployed if you need to buy more SSO, some can be less liquid and possibly earn a higher return. Diversify bonds and you can pick whichever is the more appropriate to sell as and when additional SSO shares need to be bought. Beating the index in effect distils down to getting the bond half earning a reasonable return. IME in the current low interest rate environment bonds earning a couple of percent more than needed is relatively easy, which value adds around 1% - which broadly covers costs and leaves a little surplus i.e. gross index total returns plus a little after costs.
Timing of rebalance trades has the potential to add more. But that's no different to sometimes using gearing/leverage, sometimes deleveraging, drifting from say the equivalent of 120% exposure at times down to 80% at other times and broadly averaging 100%
His return would not have been as good had he started to ease into SSO in 2008 as the dive started. This is where ocroft's method of looking for the first buy after the last sell makes sense.
Had he done what ocroft suggests he would have bought in just above $20.49, about 26% below where he did, using the prices he shows
That claim to fame goes to ocroft not me (Clive).