What The Hell Did I Just Do?

I am the last man in America to get a free account with portfoliovisualizer.com. The first thing I did was plug in the following portfolio and compare it to 100% SPDR S&P 500 (SPY) and 100% Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio.

 

BTAL and MERFX are personal and client holdings. SSO is 2X the S&P 500. I wanted to do a sort of return stack like we've been talking about by using leverage, the notional equity exposure is 120% and combine it with a couple of negatively or very lowly correlated items and a little absolute return. ETFReplay shows BTAL having a negative 0.75 correlation to the S&P 500. Most of the time it does not look like the stock market but it can go with with the market in the right circumstance. Portfoliovisualizer shows RYMFX having a 0.13 correlation. MERFX does a decent job as a volatility dampener with very little movement in either direction. I set this to rebalance annually.

The result for ten years.

 

Portfolio 1, my concoction, grew from $100,000 to $431,418. 100% SPY grew to $328,279 and 100% VBAIX grew to $196,373. Here's the year by year and annualized data.

 

The long term result is staggering, 15.56% annualized versus 14.01% for SPY for the full period. It does have a higher standard deviation at 18.74% versus 17.28% for SPY.

In 10 full years plus an 11th partial year for 2022 it outperformed in six of those years. The lag in 2015 was a matter of basis points. The worst full year was 2018 when it was down 5.74% vs 4.55% for SPY and 2.82% for VBAIX. It lagged SPY in the up year of 2016 when it lagged by 130 basis points. In the 2020 Pandemic Crash it fell 22% versus 20% for SPY and 13.2% for VBAIX although that's actually for Q1 2020 based on limits for hovering on the chart. For H1 2022 the concoction was down 17% versus down 20.5 for SPY and 18% for VBAIX. 

Interesting to me is that it did very well despite BTAL losing almost 25% for the first three and half years of this portfolio and RYMFX losing 15% in the first two years and then dropping 33% in another downtrend from mid 2015 to early 2019.

The concoction, I guess we'll go with the Random Roger Leveraged Down Concoction, certainly is not less volatile than the S&P 500 but it is not obvious that so much more pain is inflicted during down drafts. The 120% of equity is offset by 15% percentage points from the 20% allocation to BTAL and that fund's -0.75 correlation although I admit the academic nature of that observation.

I often talk about things having to go right with certain strategic decisions or in certain funds. Here's what would have to go right with this. Leveraged ETFs have a risk of the daily reset hurting investors badly for not "working" the way investors would hope. The Random Roger Leveraged Down Concoction benefited substantially from the daily reset, that can happen too but looking forward there's no way to know whether that will help or hurt you. Also it was a very good decade for stocks, what if the next 10 years stinks? Both BTAL and RYMFX need to continue to maintain their same corollary relationship to the S&P 500. I don't know why either one would start to behave differently than it has but if this happens, the Random Roger Leveraged Down Concoction would be in trouble. 

A little heresy now, it is rare that I see the daily reset on broad based indexes cause problems. No claim of perfect long term tracking, not even close but close enough? If that is in the eye of the end-user, close enough for me but you should draw your own conclusion. I will be curious to see if the single stock levered and inverse products track or get done in by the reset but using the ones I've looked at on the LSE, not so bad.

How would someone implement this? I have a thought. Our accounts are all sorts of different sizes. 40 or maybe 45% is in my solo 401k. If I ever do this, it won't be with almost half of my money, thank you. My Roth though is 10 or 11%, that might make sense or my wife's IRA is maybe 7 or 8% but I think we can all agree that if it blew up, better it's not her account.

What is more interesting is using the portfoliovisualizer tool to explore some of the ideas we've been exploring here for ages. That portfolio really is literally the first thing I plugged, very random. I believe there is merit in capital efficiency or as I have been calling it, leveraging down, even if the Random Roger Leveraged Down Concoction isn't the way to do it.