Down goes the Dow

I haven’t been on this thread. I’m talking major allocation, not dabbling, which I assume is what people mostly use them for.

I don’t have any, and I’m asking myself why not, instead of my weighted sp

you can read yourself on the increased risks of leverage and derivatives.

investopedia.com

Why 3x ETFs Are Riskier Than You Might Think

John Edwards

Understand 3x exchange traded funds (ETFs) and their key risks. Learn how compounding can affect returns.

Link:www.investopedia.com/articles/investin...

Interesting question if a person in his teens or 20s who doesn't need the money for decades should use leveraged ETFs. There might be an argument there. The leveraged ETFs have outpaced the 1X funds by a few hundred bps a year over 3 or 5 years. If that continues over decades that would make a big difference in a portfolio.

But for an adult not far from retirement, you are playing with fire. Market falls 20% you might lose half-ish of your money. The market falls 20% every 5 years or so, right? Just too much risk.

A reasonable person would look at the huge moves as more technical than fundamental, and question the durability of the gains. And that goes for the bond market as well. To pile into a leverage investment when the underlying index has moved ~9% in 12 days seems unwise to me.

Derivatives are often used to minimize risk as in energy futures.

At age 59 double leveraged long the S&P 500 in September 2009 with about 25% of my retirement. Things got worse. However, by the time I moved to 1x I had tripled my investment. Timing matters quite a bit, on either side.

I see very little value in a market driven by masses plowing into the same seven stocks. Seems very speculative to me; where people just keep tagging one another’s trade. Oh, but I am buying the Index! Sure, whatever.

Worked well for Enron.

I have used leveraged ETFs a fair amount since their inception.

The main thing besides the obvious one of the increased risk, is that they are structured in such a way that makes them ill-suited as a long term holding. That is because they are re-balanced on a daily basis. And since they are, they do not exactly follow the index at the prescribed multiple to which they target. The performance can erode over weeks and months.

This is a well known phenomenon, and you can read about it all over the net. I have personally monitored it when I had some leveraged ETFs, and it is a factor. It especially becomes a factor when the price experiences the greatest degree of fluctuation day to day.

If you want to see it work, just do a Yahoo Finance comparison of a triple leveraged ETF against the index it is supposed to track, and you can see the distortion over a long enough timeframe.

That said, I've used several, but I'm not doing so at the moment.

Who cares? The 20-something might be 100/0 or 80/20, but the retiree 30/70. Point is that there isn’t any greater relative risk, unless you are on the edge in which case you should have max 10% in equities, and probably zero

Thanks, I will look. So it takes you from 3x to something less than 3x. I will look

That's fine, but the investor should realize that by using the leveraged ETF, they are increasing their stock exposure in so doing.

For example, an investor who wants to own 10% of their portfolio with stocks, should only hold about 3.3% stocks if all of that is in a triple leveraged ETF.

Sure. But I have seen it work the other way as well, but not often - the triple leveraged ETF actually delivered a little more than 3x. You just have to stay on top of it.

Allow for a learning curve (you would be wise to do so).

* Another thing about leveraged ETFs is that they cost more - the 3xs have a net expense fee around 1% while a 1x ETF is just about nothing.

But are you really increasing stock exposure? Don’t such funds use options or something similar? More volatility, maybe.

Do you judge exposure by how much you stand to gain or lose?

If you plan to hold the s&p, why would you ever sell at a loss. Ditto 3x

Yes but gearing should overwhelm that.

I looked, since Dec’08 SPXL seems yo have vastly outperformed the s&p to today. I might be wrong

yes, you are increasing your stock exposure by exactly double for the 2x leveraged ETF and triple for the 3x leveraged ETFs. It doesn't matter how they do it with derivatives or whatever, it's performance is essentially double or triple of the index to which it tracks.

And you might sell for many reasons, including margin calls, for that matter.

1) in terms of the net expense fee, the gearing as you call it may compensate for it, or it might not. Either way, the only thing definite about the leveraged ETF is what the fee that the management gets. Everything else is speculative. All things equal, it's better to buy three times as much of a 1x ETF than it is to buy a 3x ETF, and that is because of the higher fee and daily rebalancing.

2) As for SPXL since '08, it probably did outperform the S&P, but it probably isn't a direct multiple of 3x.

Hmm...well, for one thing, I don't believe with ANY certainty in ANY annual gain. There is a gain over time yes, on average ~73% of years will be UP, but the problem is that you could have a string of down years or 4 of 5 that are down or flat for a long while. You need to stay in it and ADD to your pile (if still working) so that when the big gains come (because they WILL), you will benefit.

You have to invest to protect yourself, not just chase after what you THINK might be the best idea. This is why you should buy diversified STOCK mutual funds. As many sectors as you can, aggressive growth to conservative growth. You then ALSO make sure to get out of debt including owning a home outright and even moving to a place that doesn't cost you an arm and a leg in property taxes if you need to. You should pare down your outgo in retirement so that you could subsist for a little while on Social Security alone if you had to...or by just taking a measly 2-3% from your retirement pile (what you need to do there depends on how much you have in your retirement pile of money). Some people load up with bonds to protect against a stock market decline, but I have decided against that. Instead, once The Lovely Mrs. Flagpole finally retires, we will have at LEAST 3 years of expenses saved liquid. We have that now. The reason to have this is two-fold...1) use it to pay for expenses in retirement if the market drops a lot...2) OR, you COULD use it to just live on while delaying SS and waiting to turn 65 so that you can get medicare. If you have NO income, you will be able to get health care (through Obamacare) for dirt cheap to free. I came up with the idea to have 3 YEARS of expenses in retirement nearly 20 years ago, and at the time that seemed prudent (it still is), but the market has been good to me, and I actually don't need that safety net anymore...BUT, I still like the philosophy, so I'll likely keep that money liquid. I mean, why not?

It's really not hard:

1) Get out of debt but for a large student loan or a mortgage.

2) 15% MINIMUM into diversified stock mutual funds. You put this money in like clockwork from the time you get your first professional job until you retire.

3) Before retiring, pay off ALL debt including the house. I know some say not to pay off the house, but it's more than just peace of mind...it drops your outgo needs trememdously, and with that extra money you get to KEEP, you can do stuff, buy stuff, invest more or just let your investments grow more because you don't have to take as much from them in retirement.

4) If you WANT to play around with individual stocks, you can, but you should hit this criteria first...you have ZERO debt including a paid for house. You have AT LEAST a million dollars invested in stock mutual funds. If you are working, you are still putting 15% minimum into those stock mutual funds. I used to take Jim Cramer's advice here and say that you need to purchase no fewer than 5 individual stocks and that they should all be in different sectors of the market (which I still think is a good idea), but I've rethought that. If you have no debt and own your house outright and you have a million or more dollars invested in stock mutual funds, you can buy single stocks in any number or sectors you choose. At this point, if you lose all you invest on those individual stocks, you're not sunk at all.

DGTD prediction resolution!

Sort of. Igy didn't put a time on this prediction. But the prediction has had a year to marinate and that's a long time.

11/15/2022, page 2958

When made the SP500 was at 3991

The prediction was Sp500 2300, or -42% from that mark.

But instead today we are at SP500 4495, which is a gain of 13%

We are 95% higher today than Igy's prediction.

Going to have to give Igy a strike on this one. The baseball kind, not the bowling kind.

More on an old theme: economists still using pre-pandemic rules of thumb even though obviously things have been different this time again and again.

Here's an economist saying there was an 'ironclad' predictor of recession. Instead we had nearly 5% real growth last quarter.

David Rosenberg
@EconguyRosie
Treasury market doesn’t seem to notice that the components of the NY Fed Empire index were so awful that the May survey is consistent with a 43.5 ISM print! Iron clad recession indicator if there ever was one.

1:02 PM · May 15, 2023
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