r/investing
Came across buy and hold 17% CAGR portfolio backtested since 1987
Author shares a backtested leveraged portfolio (17% CAGR) mixing treasuries, gold, small-cap value, and SPY, seeking feedback.
- Strong historical backtest performance with 17% CAGR since 1987.
- Diversified asset allocation helps limit the maximum drawdown to -27.89%.
- Past backtests do not guarantee future results, especially for leveraged strategies.
- Long-duration treasuries and leveraged components carry significant risks in shifting macro environments.
Came across buy and hold 17% CAGR portfolio backtested since 1987
For context, my portfolio is 100% VT and chill. I came across this interesting leveraged portfolio, backtested since 1987, with the largest drawdown was only -27.89%!
https://testfol.io/?s=3wGHtKUjnI4
Mixture of 25+ Year Zero Coupon US Treasury Index ETF, managed futures, Gold, small cap value stocks, and SPY.
All buy and hold, with yearly rebalancing.
Someone explain why this is/isn't a good idea.
Backtests ending in 1987 capture 35+ years of falling interest rates which made long duration treasuries and bonds look incredible and that tailwind is gone. A 17% CAGR with -27% max drawdown sounds too good because it was curve fit to a unique macro era that won't repeat.
Thank you.
Won't repeat is probably not true, but I otherwise agree. It's not true to the current environment
Managed futures is not “trading futures” 🤦🏻♂️
Well, yeah. It can be argued that this is the greatest bull market ever.
uh.. because it has a greater CAGR and less max drawdown than voo and chill? lol
Why the assumption of an equal proportion of gains and losses for the decay calculation?
You are making a bunch of wrong assumptions, While LETFs are riskier, your math doesn't reflect the real world.
Your example of -10% +10% doesn't ever happen in the real world because volatility is never that high. What if stocks move -1% +1%, does the volatility decay math change? In fact it changes quite a bit, as volatility decay scales exponentially with volatility. Instead of -10% +10%, what about -1% for multiple days and +1% for multiple days? The volatility decay math changes massively because volatility in the real world is lower.
Since stocks usually move and compound higher, LETFs also have leveraged compounding. What happens with multiple +1% days in a row? Then there is no "decay" but the leverage actually becomes compounded as it resets daily. The result is MORE than 3x leverage despite having only 3x daily leverage.
"Therefore, mathematically, leveraged ETFs are NOT a viable long term, buy and hold, strategy."
No, the performance of many LETFs like TQQQ proves you wrong. From the Covid lows, QQQ went up 330%. Despite "decay" due to volatility, TQQQ a supposedly 3x QQQ, went up 1638%, an actual realized leverage of 4.96x. So much "decay" there.
Whether it’s 1%, 5%, or whatever the maths the same.
Normally if you had said QQQ went up 300% (3 times) and QQQ x3 went up 900% (minus a little for the higher expense ratio) i would argue that, yeah it’s been a fantastic bull market, so of course it has.
But you’re telling me QQQ x3 NOT ONLY went up 3x because of the leverage, but also exceeded the theoretical maximum? To actually almost 5x? And that math DOESNT sound wrong to you? Or anyone else, not picking on you specifically?
"Whether it’s 1%, 5%, or whatever the maths the same." "To actually almost 5x? And that math DOESNT sound wrong to you?" "But we are talking long term buy and hold which, believe it or not, does include bear markets"
There has literally been 2 bear markets since 2020 for QQQ. What it sounds like is you refuse to do or understand maths and just go with what "sounds" correct because it's safe to assume what everyone else thinks is correct. Classic sheep behavior. What you and almost everyone miss is "volatility decay" is not a set number, it's a range dependent on volatility, no the math isn't the same.
Here's the MATH and not what "sounds" correct:
100 \- 90 \- 99 is -10% +10%, total -1%. For a 3x LETF, that's 100 \- 70 \- 91, total -9%. That's a "decay" of \~ -6% because the expected 3x return is -3%.
If you go down -1% for 10 days so that the unleveraged QQQ or index falls 10% total and then go up 1% multiple days what you get is:
100 \- 100\0.99\^10 or 90.44 \- 90.44\1.01\^10 or 99.9, total -0.1%. For a 3x LETF, that's 100 \- 100\0.97\^10 or 73.74 \- 73.74\1.03\^10 or 99.1, total -0.9%. That's a "decay" of -0.6% over 20 days because the expected 3x return is -0.3%.
See how the MATH on volatility decay completely changes dependent on volatility? "Volatility decay" is a range from almost zero if the index moves \~1% per day, to somewhat high if index moves over 10%. How much do you think the QQQ index moves on average, closer to 1% per day or 10% per day?
Now what happens when there is a bull market? Multiple days of +1% moves like the previous example shows this: if we move +1% for 10 straight days,
100 \- 100\*1.01\^10 or 110.46, that's 10.46% due to compounding. For a 3x LETF?
100 \- 100\*1.03\^10 or 134.39, that's 34.39% due to compounding.
You see how the "expectation" for 3x LETF is 10.46% x 3 or 31.38%, BUT due to "leveraged compounding," the actual return is 34.39%, a realized leverage of 3.3x?
The MATH you are missing is "volatility decay" isn't the whole story. If you don't include "leveraged compounding," you completely misunderstood the actual results.
I hate just saying “look at this graph”
But people really do need to just look at some graphs…
Take a look at the graph of ticker symbol DEEZ.
The real risk isn’t “leveraged ETFs lose long term”. The risks are catastrophic drawdowns, a lost decade or sequence of returns risk.
I'd be surprised if you could have maintained 2x exposure for all those years. Maybe with futures but the portfolio size would need to be very large.
Also Long Term Zero Coupon Treasuries don't look nearly as attractive today (low yield that is below inflation) as they did from 1987-2021 (relatively higher yield, above inflation).
Hindsight bias. And because you have no idea what you are talking about and think you found a magic algorithm.
Now simply add SPMO, it will only be 11yrs, but then ask yourself if you would have wanted that as your port last decade. https://testfol.io/?s=kAZ6wRd8dWv
No argument there.