4 ms·

I mean, you can tilt toward value or hedge your portfolio with options or something. I wouldn’t actually do the latter though, put options are pretty much alway

by mruts 7y ago

I mean, you can tilt toward value or hedge your portfolio with options or something. I wouldn’t actually do the latter though, put options are pretty much always overpriced by at least 50% or more. Tilting toward value until the next election would be a reasonable move. Or you could try a 60/40 equity/bond portfolio. Personally though, I just invest in a 3x leveraged S&P 500 ETF and roll with the punches. Unless there’s some cataclysmic event, that 3x leverage will almost always outperform the S&P, even with the volatility drag.

tdurden 7y ago
You don't "invest" in a 3x leveraged ETF -- they are day-trading instruments.
- mruts 7y ago
  Says who? I hold them long-term at it works out very well. The only problem is the volatility tax you have to pay. Formula for volatility tax is: actual returns = return - var(r) / 2 If the S&P 500 has a Sharpe ratio of one and say, a 10% mean yearly return and 10% vol, we first need to turn it into single day returns and volatility (since these leveraged products rebalance daily) so we get: S&P 500 Daily Returns = S&P 500 Daily Vol = 0.1 / sqrt(252) = .006299 or ~6 basis points Before the volatility tax, thix means that our leveraged product should get 18 basis points of returns and volatility daily. In our annualized we get: 3x S&P 500 Annualized Returns = Annualized Vol = 29.99% Now we factor in the volatility tax: actual returns = .2999 - .2999^2 / 2 = 25.49% Now comparing with actual market data: https://www.etf.com/UPRO#overview https://www.etf.com/UPRO#overview PERFORMANCE [as of 09/19/19] 1 MONTH 3 MONTHS YTD 1 YEAR 3 YEARS 5 YEARS 10 YEARS UPRO 12.19% 7.41% 64.68% 1.13% 34.64% 22.78% 31.97% The annualized return of UPRO is 31.97%. If we look at: https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average... We can see that the S&P 500 3x leveraged is an excellent investment on a non risk-adjusted basis. On a risk-adjusted basis it's worse, the S&P 500 in the example having a Sharpe ratio of 1 while the 3x S&P 500 having a Sharpe ratio of 0.8499. But since you can't eat risk adjusted returns and it's going to be difficult for retail investors to get significant leverage to actually invest in good risk-adjusted portfolios, the 3x daily levered S&P 500 is a fantastic investment.
  - tdurden 7y ago
    > Says who? The prospectus of UPRO [1] : "returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period." [1] https://www.proshares.com/funds/upro.html https://www.proshares.com/funds/upro.html
    - mruts 7y ago
      Clearly. But that’s not a problem unless you don’t understand it.

by mruts 7y ago

tdurden 7y ago

You don't "invest" in a 3x leveraged ETF -- they are day-trading instruments.

mruts 7y ago
Says who? I hold them long-term at it works out very well. The only problem is the volatility tax you have to pay. Formula for volatility tax is: actual returns = return - var(r) / 2 If the S&P 500 has a Sharpe ratio of one and say, a 10% mean yearly return and 10% vol, we first need to turn it into single day returns and volatility (since these leveraged products rebalance daily) so we get: S&P 500 Daily Returns = S&P 500 Daily Vol = 0.1 / sqrt(252) = .006299 or ~6 basis points Before the volatility tax, thix means that our leveraged product should get 18 basis points of returns and volatility daily. In our annualized we get: 3x S&P 500 Annualized Returns = Annualized Vol = 29.99% Now we factor in the volatility tax: actual returns = .2999 - .2999^2 / 2 = 25.49% Now comparing with actual market data: https://www.etf.com/UPRO#overview https://www.etf.com/UPRO#overview PERFORMANCE [as of 09/19/19] 1 MONTH 3 MONTHS YTD 1 YEAR 3 YEARS 5 YEARS 10 YEARS UPRO 12.19% 7.41% 64.68% 1.13% 34.64% 22.78% 31.97% The annualized return of UPRO is 31.97%. If we look at: https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp https://www.investopedia.com/ask/answers/042415/what-average... We can see that the S&P 500 3x leveraged is an excellent investment on a non risk-adjusted basis. On a risk-adjusted basis it's worse, the S&P 500 in the example having a Sharpe ratio of 1 while the 3x S&P 500 having a Sharpe ratio of 0.8499. But since you can't eat risk adjusted returns and it's going to be difficult for retail investors to get significant leverage to actually invest in good risk-adjusted portfolios, the 3x daily levered S&P 500 is a fantastic investment.
- tdurden 7y ago
  > Says who? The prospectus of UPRO [1] : "returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period." [1] https://www.proshares.com/funds/upro.html https://www.proshares.com/funds/upro.html
  - mruts 7y ago
    Clearly. But that’s not a problem unless you don’t understand it.