The Portfolio For Real Buy & Hold Returns

The Portfolio For Real Buy & Hold Returns

By: Corey Philip
Updated: August 2, 2016

If you’re going to buy and hold, why not BUY AND HOLD ON.  Buy and hold strategies typically come with a very large draw downs and a very low risk/reward ratio that results in a Sharpe ratio of about .45 all for an 8% return over the long term.  My thought is, if you’re going to buy and hold, and you’re truly in it for the long term, wouldn’t it be nice to get a better return?

Of course the answer is Yes!

Take a look at this portfolio.  50% SP500 and 50% Long term treasuries with an annual rebalance.  This simply portfolio has done quite well. Actually amazingly well.  Since 1988, the furthest back we can easily go with monthly data the return is a nice 10.06% per year with a drawdown of 20.46% and a Sharpe ratio above 0.8.  That’s pretty exciting.

Total returns of a 50/50 SP 500 and Long Term treasuries strategy since 1972
Total returns of a 50/50 SP 500 and Long Term treasuries strategy since 1972

When I was talking about a better return though I was talking about 2% better.  I’m going for a little more.  With leveraged ETFs that can be achieved.  We have ETFs that give both 2x and 3x the leverage of these asset classes.  That means you get 2x or 3x times the return of the portfolio above with also the same 2 or 3x drawdown and volatility, but for a long term buy and hold; it shouldn’t matter.  Not to mention 2x or 3x the volatility and draw down of this allocation isn’t much more than that of a global allocation non leverage (historically).  It is important to note that they are daily rebalancing ETFs so they are not exactly 2x or 3x over the long term but they are pretty close.

For the remainder of this post we will be assessing this allocation with 3x leverage via the ETFs SPXL and TMF.

With the inception of these two funds being 2009 (earlier for SPXl) there isn’t an extremely long history, but it is enough to assess whether these fund properly deliver the 3x exposure.  Check out the returns of the non-leveraged portfolio and the 3x portfolio since April 16th 2009.

Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009
Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009
Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009 with 3x leverage funds SPXL and TMF
Total returns of a 50/50 SP500 and Long Term Treasury Strategy since April 16th 2009 with 3x leverage funds SPXL and TMF

 

 

 

 

 

 

 

 

You can see from the statistics that the 3x portfolio does deliver with about 3x times the return, volatility and drawn down.  In the SPXL & TMF chart you are correctly seeing that $10,000 invested would become $88,410 with an astounding 35% growth rate.   Some might point out that since 2009 we have been in a great bull run and this is just the result of such and Iin a volatile market, leverage decay will eat a way.  That is partially true.  I don’t believe for at all that 35% returns will continue but rather will revert to  slightly under 3x the long term returns of the non leveraged portfolio.  However leverage decay is another story. Let’s see how this leverage decay would’ve worked in turbulence.  Things got turbulentin 2015 and started showing positive trend in April 2016.  How’d they do in this period?

SPY & TLT funds rebalanced from 01/01/2015 - 03/31/2016.
SPY & TLT funds rebalanced from 01/01/2015 – 03/31/2016.
SPXL & TMF funds rebalanced from 01/01/2015 - 03/31/2016. 3x leverage get skiddish during such a volatile time
SPXL & TMF funds rebalanced from 01/01/2015 – 03/31/2016. 3x leverage get skiddish during such a volatile time

 

 

 

 

 

 

 

 

Things did get dicey.  While volatility and drawdown was 3x, the return was actually lower with the leveraged funds.  However, shit didn’t hit the fan as many of the naysayers of leverage predict.  In fact if you could’ve held on (this is and hold after all) another 4 months until now, the 3x strategy would be on its way to returning its historic 3x returns.

SPXL and TMF funds rebalanced from 01/01/2015 - 07/22/2016. (Notice returning to normal returns)
SPXL and TMF funds rebalanced from 01/01/2015 – 07/22/2016. (Notice returning to normal returns)
SPY and TLT funds rebalanced from 01/01/2015 - 07/22/2016.
SPY and TLT funds rebalanced from 01/01/2015 – 07/22/2016.

 

 

 

 

 

 

 

 

After reviewing the charts for the lifespan of these funds, we can indeed expect (close to) the 3x leverage returns of a non-leveraged SP 500/ Long Term treasury portfolio.  For a true buy and hold disciple, this a dream portfolio.

I plan to do many more updates on the research into this portfolio strategy.

Coming updates:

  • Why it works: low correlation, long term appreciation, it is simple
  • Possibly timing to avoid high volatility with the cape ratio
  • Tax Efficiency
  • Synthetic strategy test with daily 3x leveraging
  • Arguments that this strategy will not continue: ( levered ETFs aren’t as bad as you hear )
    • how do we know it is going to continue
    • -only allocated to US: bogle is only allocated to US
    • -sudden drops
    • -decay: it doesn’t KILL you
    • -Interest rates: the 70s
Corey Philip
August 2, 2016
Corey Philip

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.