"If you want to run Cool, you got to run on Heavy, Heavy Fuel."
Here in the UK we don't have ETF's, instead we have Investment Trusts - stocks who sole business is ... investing in stocks (and/or bonds, commodities etc. i.e. portfolios). The longest running version have been going since the 1860's. Available ETF's tend to be domiciled in Ireland, and we used to have access to US ETF's until FATCA came alone (over burdening US reporting requirements).
As part of a typical Investment Trust package the fund manager is often granted the right to apply modest leverage, or hold back some cash, some set 10% limits either way, others 20%, so for instance a fund might be 80/20 at one time, 20% leveraged (120/0) at other times. It's quite common to see those funds outperform over the mid/longer term, typically by enough to offset their (and trading) charges/fees, and enough to make the fund cost efficient for investors, 0.5% to 1% type degrees where the fund might levy a 0.35% fee and bear 0.15% costs.
So I applied that concept to a AIM of the Dow real index price (Dow index / prior months CPI index, the one month lagged CPI value makes little/no difference to the broader outcome/picture). Which being 'real' (after inflation) means the Portfolio Control is also in effect the real value. So I opted to accelerate that by growth, assuming growth to be 2%/year (so PC increased at a additional 2%/year monthly pro-rata rate).
AIM that, allowing for negative AIM cash (where a actual running portfolio would have run out of cash with which to buy more shares) - purely on paper. Once/year align your actual portfolio to that, but where if AIM CASH was more than -20% negative (-30%/whatever) limit that to -20%, also if AIM CASH was more than +20% limit that to 20% maximum. 80/20 to 120/0 stock/cash ranging. Plotting that and at stock index highs AIM was directing to hold 80/20, at lows it was indicating 120/0. When in leverage I assumed cash interest to be +2% higher i.e. the cost of borrowing was T-Bills + 2%, when non-leveraged I just used straight T-Bill interest rates as-is.
Broadly that was more rewarding that the stock index total return, similar to Investment Trusts, 0.5% to 1% type improvements. Drawdowns remained much the same as buy-and-hold, SWR was improved. Tended to average around 100/0 (0% average cash).
Makes one wonder whether Buffett and Investment Trusts managers read LIchello's concepts. FCIT https://www.trustnet.com/factsheets/T/FJ19/f&c-investment-trust-plc as one example is on a recent 8% gearing factor (its share price is also at a 9% discount to net assets). Buffets cash reserves wax and wane more irregularly https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/cash-on-hand - seemingly more a case of being deployed as and when bargains knock at his door. Buffett also has leverage in the way of free money, insurance arm pool of premiums paid in lieu of later claims being paid out, a big pile of cash that cost nothing that even if deposited into T-Bills earn some interest.
Nowadays with ETF's leveraging up 20% is a breeze. For 20% leverage for instance that just means reducing SPY 1x holdings by 20% and buying SSO 2x with the sale proceeds ... or suchlike.
As one example case, 1929 highs and it was at 80/20, at the subsequent early 1930's lows it had transitioned to 120/0
Another case was that it had more progressively stepped up from 120% stock in 1994 to holding 20% cash at the start of 1998, remained at that until 2008, at the start of 2009 stepped down to 100/0, 2010 it stepped down to 120/0.
Worked both the top and bottom ends so-to-speak, and worked them reasonably well, AIM directed 10.3% nominal total return slope, buy and hold 9.5% slope.
AI
