Replies to post #39799 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

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).

[ls7550]

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%

[lrp42]

Hi Allen,

For what it is worth:

I went over to PerfCharts to see how the leveraged ETFs performed compared to non-leveraged ETFs. At PerfCharts the ETFs I compared allowed me to go back to August 4, 2008. I believe that the majority of the last bear market meltdown was included in these results:

+130.27% SPY (non-leveraged)

+303.36% SSO (2X leveraged)

+451.25% SPXL (3X leveraged)

Now then, if I move the slider over to March 10, 2009, which I believe was near the bottom of the last bear market, it shows the following results:

+230.22% SPY (non-leveraged)

+745.02% SSO (2X leveraged)

+1,751.81% SPXL (3X leveraged)

I am no mathematician, but to me it shows that the compounding done in leveraged investments compared to non-leveraged is dramatic, both on the way down as well as the way up.

I have begun to have a fondness for using leveraged ETFs in LD-AIM programs. Personally I don't want to tie up a lot of my meager capital using leveraged ETFs in regular AIM programs. Don't know if I will have the same fondness if we happen to go back into a major bear market as we did in 2008-2009.

Best regards,

Ray