The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: nmz on January 15, 2016, 07:22:49 PM
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A lot of people advocate investing in index funds that follow the market for passive investing over the longterm. Given the thought that the market will rise in the longterm, would it be smart to invest in a 2x or 3x ETF to increase gains? SPY has been the majority of my stock portfolio for several years now, however when compared to the leveraged etfs, the missed gains is pretty staggering:
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1452910374916&chddm=646323&chls=IntervalBasedLine&cmpto=NYSEARCA:SPY&cmptdms=0&q=NYSEARCA:UPRO&ntsp=0&ei=iKaZVuHKMOqAiAK8ioKIAg
Any thoughts on these types of leveraged investments? I realized that your 2x/3x exposed to losses, however with the mentality that the market will go up over the long haul, it seems like doubling/tripling down would be a smart move...
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In the bear market 2008 the market went down ~55%. So a 2xETF would have gone to 0 and you would have lost all your money.
On top of that you pay financing cost for the leveraged part to the ETF.
We had a six year bull market from 2009; one of the longest in history; valuations are high.
Nobody knows how the market will move but it would be absolutely possible that stocks crash again 50%+ in 2016.
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A lot of people advocate investing in index funds that follow the market for passive investing over the longterm. Given the thought that the market will rise in the longterm, would it be smart to invest in a 2x or 3x ETF to increase gains? SPY has been the majority of my stock portfolio for several years now, however when compared to the leveraged etfs, the missed gains is pretty staggering:
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1452910374916&chddm=646323&chls=IntervalBasedLine&cmpto=NYSEARCA:SPY&cmptdms=0&q=NYSEARCA:UPRO&ntsp=0&ei=iKaZVuHKMOqAiAK8ioKIAg
Any thoughts on these types of leveraged investments? I realized that your 2x/3x exposed to losses, however with the mentality that the market will go up over the long haul, it seems like doubling/tripling down would be a smart move...
Sounds good in theory but I seem to remember there being something fundamentally about the way the rebalance or reset where you lose over the long term to the point you can't hold them more then a few weeks
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Question asked many times. In short beta decay.
Day 1: Index A goes from 100 to 80, losing 20%.
3x leveraged index A goes from 100 to 40, losing 60%.
Day 2: Index A goes from 80 to 100, gaining 25%. Total return over 2 days, 0%.
3x leveraged index A gains 75%, going from 40 to 70. Total return over 2 days, -30%.
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These geared ETFs are only going to work if you manage to pick the bottom of a big crash and choose that moment to buy in. Buy and hold will not work, you have to pick the uptrend. If you want leverage use a margin loan, at least you can own the regular vanguard shares and know their value and how market fluctuations are going to effect your portfolio. The threat of a margin call also keeps you honest - if your portfolio drops you might have to deposit more money or you'll be forced to sell at a loss. That's a good thing - it prevents you from going completely broke. A leveraged ETF has no margin call - it can go all the way to zero.