Sunday, December 14, 2014 5:06:01 AM
One way to manage holding a mixture of 2x stock, 1x stock, long dated bonds, short dated bonds portfolio might be to level to average 100% stock exposure for the target choice and allocate 41.7% to each of two AIM's, one for 2x, the other for 1x, using AIM-HI settings (80/20 initial stock/cash (20% initial cash reserve)), and utilise a 40% Vealie rule.
That broadly aligns to holding between 75% and 125% stock exposure, i.e. not too little, not too much.
i.e. if both AIM's have fully exhausted 'cash' then 41.7 in 2x and 41.7 in 1x is equivalent to 125 stock exposure.
if both are hitting vealies of 40% max cash then 41.7 x 0.6 = 25 stock, which with 25 in 2x and 25 in 1x = 75% stock combined.
For bonds - manage that as a barbell of long/short dated, adjusting as you deem appropriate i.e. if AIM of stocks is indicating buy then select whether you think reducing long or short dated to be the more appropriate at the time. You might also revise the long/short dated barbell over time outside of any AIM indicated trades being apparent.
A 'problem' with that however is that average stock exposure tends to steer towards whatever the Vealie level was set to, which in this case is 75% average stock exposure. Revising the Vealie to 20% corrects that. So for 100% average stock exposure you end up with AIM's of
41.7% allocation to 2x stock AIM-HI with 20% Vealie rule
41.7% allocation to 1x stock AIM-HI with 20% Vealie rule
Quarterly reviews, 10% Safe, 5% minimum trade size.
(With that '100% average stock' sorted, you then might decide upon asset allocation you prefer, i.e. for 50/50 you'd allocate half to the above, half to bonds (or whatever). Periodically reviewing/rebalancing as you deemed to be appropriate)
Broadly with cash in shorter term bonds, such a portfolio will tend to provide similar rewards to 100% stock. I haven't personally seen AIM trading tending to add to rewards. Fundamentally it distils down to whether the choice/timing of bonds as to whether that adds (or detracts) value. Which further distils down to whether your bonds beat or lag LIBOR+x% i.e. the cost that the leveraged ETF incurs to provide a leveraged stock ETF.
IF your bonds do well then a third in 3x, two thirds bonds is an appropriate choice as that scales up the benefit of bonds having 'outperformed'. Which is not as easy/simple as it might seem. If for instance you use VFISX (short dated bonds) as a proxy for what leveraged ETF's might be paying to borrow and compare that with VBMFX a broad bond fund
then for much of time there may be little difference (benefit) apparent. Having been through such methods in practice in more recent years, my inclination is towards simplification and cost reduction going forward. Whilst it did work reasonably well for me, much of that might be attributed more to luck than skill. The bond market is larger and more professional than the stock market, an arena in which I'm neither particularly skilled nor have the trading cost efficiencies that the pro's have.
As I've generally been lucky with my investing to date, going forward I'm looking to totally lock down and retire into a more passive asset allocation and have been migrating holdings accordingly. Enough in bonds to cover living expenses for 30 years which likely will see me out. The remainder in stock buy and hold/accumulation/growth to cover longevity/inheritance. Around half in low cost index trackers, half in individual stocks, buy and hold, accumulate dividends across the year and add another stock(s) to the set with those dividends once/year.
Adopting some leveraged etf's, some 1x, some long dated bonds, some shorter dated (and/or corporate bonds etc.) can do OK when managed well. Combined with AIM providing advice as to appropriate times to be adding/reducing and you're less likely to suffer the losses that many private investors endure due to human emotion/error. My family however have little interest in such activity and accordingly I need to structure holdings towards something that is more appropriate for them to inherit come the time I lose my marbles or depart this world. Not that I have any intention of either any time soon, but I'm approaching a age when such factors do need to be considered.
That broadly aligns to holding between 75% and 125% stock exposure, i.e. not too little, not too much.
i.e. if both AIM's have fully exhausted 'cash' then 41.7 in 2x and 41.7 in 1x is equivalent to 125 stock exposure.
if both are hitting vealies of 40% max cash then 41.7 x 0.6 = 25 stock, which with 25 in 2x and 25 in 1x = 75% stock combined.
For bonds - manage that as a barbell of long/short dated, adjusting as you deem appropriate i.e. if AIM of stocks is indicating buy then select whether you think reducing long or short dated to be the more appropriate at the time. You might also revise the long/short dated barbell over time outside of any AIM indicated trades being apparent.
A 'problem' with that however is that average stock exposure tends to steer towards whatever the Vealie level was set to, which in this case is 75% average stock exposure. Revising the Vealie to 20% corrects that. So for 100% average stock exposure you end up with AIM's of
41.7% allocation to 2x stock AIM-HI with 20% Vealie rule
41.7% allocation to 1x stock AIM-HI with 20% Vealie rule
Quarterly reviews, 10% Safe, 5% minimum trade size.
(With that '100% average stock' sorted, you then might decide upon asset allocation you prefer, i.e. for 50/50 you'd allocate half to the above, half to bonds (or whatever). Periodically reviewing/rebalancing as you deemed to be appropriate)
Broadly with cash in shorter term bonds, such a portfolio will tend to provide similar rewards to 100% stock. I haven't personally seen AIM trading tending to add to rewards. Fundamentally it distils down to whether the choice/timing of bonds as to whether that adds (or detracts) value. Which further distils down to whether your bonds beat or lag LIBOR+x% i.e. the cost that the leveraged ETF incurs to provide a leveraged stock ETF.
IF your bonds do well then a third in 3x, two thirds bonds is an appropriate choice as that scales up the benefit of bonds having 'outperformed'. Which is not as easy/simple as it might seem. If for instance you use VFISX (short dated bonds) as a proxy for what leveraged ETF's might be paying to borrow and compare that with VBMFX a broad bond fund
then for much of time there may be little difference (benefit) apparent. Having been through such methods in practice in more recent years, my inclination is towards simplification and cost reduction going forward. Whilst it did work reasonably well for me, much of that might be attributed more to luck than skill. The bond market is larger and more professional than the stock market, an arena in which I'm neither particularly skilled nor have the trading cost efficiencies that the pro's have.
As I've generally been lucky with my investing to date, going forward I'm looking to totally lock down and retire into a more passive asset allocation and have been migrating holdings accordingly. Enough in bonds to cover living expenses for 30 years which likely will see me out. The remainder in stock buy and hold/accumulation/growth to cover longevity/inheritance. Around half in low cost index trackers, half in individual stocks, buy and hold, accumulate dividends across the year and add another stock(s) to the set with those dividends once/year.
Adopting some leveraged etf's, some 1x, some long dated bonds, some shorter dated (and/or corporate bonds etc.) can do OK when managed well. Combined with AIM providing advice as to appropriate times to be adding/reducing and you're less likely to suffer the losses that many private investors endure due to human emotion/error. My family however have little interest in such activity and accordingly I need to structure holdings towards something that is more appropriate for them to inherit come the time I lose my marbles or depart this world. Not that I have any intention of either any time soon, but I'm approaching a age when such factors do need to be considered.
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