Radical thought

[Qs Laptop]

As you may recall, we recently had GS#1 who is now 18 months old and GBaby#2 "in the oven" and my DM recent died. Part of my inheritance will include an inherited Roth IRA of ~$50k.

This is money that I would never need. I'm thinking of investing the Roth for dramatic growth for the grandkids benefit and then taking the money out in the tenth year as required.

I'm thinking of Hedgefundie's Excellent Adventure Portfolio (HFEA). See attached link and you can also find it on bogleheads.

HFEA is 55% 3x leveraged S&P 500 bull ETF (UPRO) and 45% 3x leveraged 20-year Treasury bull ETF (TMF) that would be rebalanced quarterly... a risky and volatile combination that backtests very well.

The reason for using a Roth is because with the HFEA the quarterly rebalancing can result in signifcant taxes if done in a taxable account.

The way I figure it is even if the return is average then the grandkids will remember grandpa as a genius.

Thoughts? Am I crazy?

You're not crazy, you're brilliant! Great idea that I'm tucking away for possible future use.

I particularly like the use of the Roth to avoid taxation. The only caveat I would consider is perhaps winding down the risk factor as you reach the last couple of years. I'd still be aggressive in those years, but not at a 3X leveraged factor.

 

[pb4uski]

Fair point. Not as sure how I would do that but perhaps either shift to 2x leveraged ETFs at some point or find some way to use stop loss orders to reduce the risk.

 

[DJRR]

Another option might be to buy $50k of 20 year strips and then put the other ~ $30k into the leveraged strategy. That limits the downside to your original investment but caps your upside if things go really well.

 

[Markola]

The rolling 3 and 5 year returns of the HFEA portfolio were actually quite a bit better than MSTR, but not as good as the 5 digital monopolies. So some allocation to the 5 digital monoploies in a swing for the fences is something to be considered but it would make quarterly rebalancing a bit more of a chore.

Yes, MSTR is a legacy tech company that made a fundamental makeover and long term investment in August 2020. Since then, boom. Their story is interesting to, well, Google.

 

[SecondCor521]

I have an idea for you that is a longshot for a variety of reasons.

You might be able to disclaim the inherited Roth. It might then go to those grandkids. They might be able to wait until 18 to start their SECURE 2.0 clock.

If all those if's happen to work out, then you'd have 28 years instead of 10.

 

[pb4uski]

Great minds think alike. I aleady considered that. From what I read, if I disclaim it I cannot designate who gets it so it would go to my 4 siblings.

 

[DrRoy]

I would just do SPY and TLT.

 

[RetireBy90]

If I understand you correctly, this would be for grandkids. I had a similar situation managing mom's investments. They were in Wells and Fido accounts. She had sufficient income from a pension and SS to fund her expenses and a bit left over.

I tried to discuss with Wells that the timeframe for the funds was the expectancy of her heirs not hers as she wouldn't need those funds.

If the funds are for grandkids college then time frame is what 18 years ? If for first house then 25 or maybe 50 for starting retirement accounts. I would plan for the time frame of the user of the funds, and in this case probably 80% equities. Maybe 90%.
Just one more voice

 

[MichaelB]

I think the idea presented by the OP is interesting and smart, and it’s one I’ll keep in mind for my own grandchildren.

I do wonder about the choice of investment. Perhaps instead of leveraged funds, an ETF like the ARK fund, or even 4-5 small emerging technology equities.

 

[pb4uski]

If I understand you correctly, this would be for grandkids. I had a similar situation managing mom's investments. They were in Wells and Fido accounts. She had sufficient income from a pension and SS to fund her expenses and a bit left over.

I tried to discuss with Wells that the timeframe for the funds was the expectancy of her heirs not hers as she wouldn't need those funds.

If the funds are for grandkids college then time frame is what 18 years ? If for first house then 25 or maybe 50 for starting retirement accounts. I would plan for the time frame of the user of the funds, and in this case probably 80% equities. Maybe 90%.
Just one more voice

The 10 year time horizon is because it is in an inherited Roth IRA that I need to drain in 10 years combined with the quarterly rebalancing creating short term capital gains and losses (hopefully more gains than losses).

After the 10 years the money will still be earmarked for the benefit of the grandkids but probably not so aggressively invested.

Alternatively, I could just sell the positions and withdraw the money and put it in my taxable account and the move the same amount of money from my personal Roth to a separate personal Roth with the grands as beneficiaries and continue the excellent adventure.

 

[Rianne]

Great strategy and I learned something. I didn't know you could inherit a Roth and keep it a Roth. No taxes for the beneficiary.

 

[ERD50]

I think the idea presented by the OP is interesting and smart, and it’s one I’ll keep in mind for my own grandchildren.

I do wonder about the choice of investment. Perhaps instead of leveraged funds, an ETF like the ARK fund, or even 4-5 small emerging technology equities.

But isn't this still based on the premise that one can "beat the market"? And it seems the majority here view that as a 'wish', rather than a 'plan'.

(And I did check this in the 'Fire and Money' sub-forum, not the 'Active investing...' sub-forum)

-ERD50

 

[CRLLS]

You have me thinking. I have 3 grandkids 17, 5 and 6. Although funding grandkids college has not been a plan of ours, we find that we are in the position to help in that direction and have decided a few months ago to do just that. The little ones are very long term. In our case that would come from our Roths, not an inherited Roth so a 10 year timeframe is not a limitation for the two. I particularly like the idea of making a separate Roth for them.

I know nothing about leveraged ETFs. can you recommend a place to learn about them?

 

[MichaelB]

But isn't this still based on the premise that one can "beat the market"? And it seems the majority here view that as a 'wish', rather than a 'plan'.

(And I did check this in the 'Fire and Money' sub-forum, not the 'Active investing...' sub-forum)

-ERD50

Not at all. It’s a well articulated effort to increase investment risk with the objective of gaining a higher return.

 

[GaryInCO]

But isn't this still based on the premise that one can "beat the market"? And it seems the majority here view that as a 'wish', rather than a 'plan'.

OP's idea is based on 60/40, which is a well-established way to improve results. You might not "beat the market" (SPY alone) but historically you get good results with reduced volatility. The UPRO/TMF implementation just increases the leverage.

UPRO is not meant to be a long term holding. Don't think that if the S&P averages 8% annually over the next 10 years that you're going to average 24. It doesn't work that way.

Not generally, no. But sometimes it does even better.

3x levered funds like UPRO and TMF exactly triple the underlying (SPY and TLT) results -- but on a daily basis. If SPY goes up 1% today, UPRO will go up precisely 3.0%. But that does NOT mean you get 3x returns over a longer period.

If the market went up every day, that would triple your returns. BUT when the market goes up AND down, it doesn't match the 3x target. Because the levered fund buys or sells to match the underlying at the end of the day, after the market has already moved, you end up "buying high and selling low," which reduces your returns below the expected 3x. 2x is a reasonable expectation.

However... if you look at SPY and UPRO since 2010 ... SPY (adjusted for dividends) increased from 82.90 to 456.40, roughly a 5.5x growth. 3x that would be a 15.5x growth. But UPRO grew from 1.79 to 48.59, roughly a 27x increase. Why? No idea. I've never seen it do that!! Hmm. Gonna have to look into that.

 

[pb4uski]

But isn't this still based on the premise that one can "beat the market"? And it seems the majority here view that as a 'wish', rather than a 'plan'.

(And I did check this in the 'Fire and Money' sub-forum, not the 'Active investing...' sub-forum)

-ERD50

There are 14 years of data available since UPRO started. Of those 14 years, the HFEA portfolio had higher total return than VTI in 11 of the 14 years. That included 9 positive years and 2 negative years. To be clear, in the negative return years the HFEA portfolio had higher losses than VTI. The only years where HFEA underperformed VTI were 2013, 2015 and YTD 2023.

The results are broadly similar compared to a 60/40 stock/bond mix.

Below Portfolio 1 is the HFEA portfolio (55% UPRO/45% TMF, rebalanced quarterly), Portfolio 2 is VTI and Portfolio 3 is 60% VTI/40% VBTLX, rebalanced quarterly).

My view is that it is inconclusive because there isn't enough data but it seems possible that you can "beat the market" with the HFEA portfolio if you can stomach the volatility. I'm thinking that for "found" money for the grandkids where if it fails they'll never know that grandpa screwed up then it is a risk worth taking.

Portfolio Analysis Results (Jan 2010 - Nov 2023)

Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	Market Correlation
HFEA Portfolio	$50,000	$735,429	21.31%	28.92%	73.88%	-64.15%	-69.79%	0.79	1.24	0.72
VTI	$50,000	$258,320	12.52%	15.30%	33.45%	-19.51%	-24.81%	0.79	1.25	1.00
60% VTI/40% VBTLX	$50,000	$158,250	8.63%	9.64%	21.66%	-16.82%	-20.70%	0.81	1.29	0.98

 

[SecondCor521]

Great minds think alike. I aleady considered that. From what I read, if I disclaim it I cannot designate who gets it so it would go to my 4 siblings.

Right, that's one of the first hurdles. If you disclaimed, it would go according to the original owner's estate plan as if you had predeceased them.

That's part of why I recommended to my Dad that he list his three children as beneficiaries per stirpes. I am likely to disclaim, and without the per stirpes designation the disclaimed assets would have gone to my sisters instead of my children.

Of course my Dad's preference and intent was that if any of his children predeceased him, that child's share would go to that branch's grandchildren, so what he wanted and what I wanted thankfully aligned.

I'm probably going to disclaim 3/4 of my Dad's traditional IRA, so my three kids and I will each have an equal share (of my 1/3 share). This does several things. It helps me avoid estate taxes a little bit. It gives my kids an early try at managing an inheritance while I'm still around so I can help them or give them feedback if they want it. It gives them an early boost (a la the Die with Zero book) that hopefully will be more consequential than some larger amount in their 50s. It also helps with income taxes, since 1/10th (10 years) of 1/4th (disclaimer result) of my 1/3rd share doesn't really push them into excessive tax brackets.

 

[GaryInCO]

However... if you look at SPY and UPRO since 2010 ... SPY (adjusted for dividends) increased from 82.90 to 456.40, roughly a 5.5x growth. 3x that would be a 15.5x growth. But UPRO grew from 1.79 to 48.59, roughly a 27x increase. Why? No idea. I've never seen it do that!! Hmm. Gonna have to look into that.

D'oh !!! Brain fade.

You have to look at the annual growth, not the compounded growth over a long period. So in the example back to 2010, that's just short of 24 years -- I'll cheat and call it 24 even. SPY grew 5.5 ^ (1/24) - 1 = 7.4% per year, and UPRO grew 27^(1/24) - 1 = 14.7% per year. So the variance penalty (buy high sell low) dropped it from 3x (daily leverage) to 2x (long-period leverage) -- right where I expected it.

 

[Texas Proud]

So, mentioned this to one of my sisters and she is going to try it with one of her grandkids money... it will not be that much but it is a shoot for the moon investment...


I am actually thinking about doing this on one of my small accounts... just wondering how small... $10K might be too small but $50K might to too high...

 

[Markola]

There are 14 years of data available since UPRO started. Of those 14 years, the HFEA portfolio had higher total return than VTI in 11 of the 14 years. That included 9 positive years and 2 negative years. To be clear, in the negative return years the HFEA portfolio had higher losses than VTI. The only years where HFEA underperformed VTI were 2013, 2015 and YTD 2023.

The results are broadly similar compared to a 60/40 stock/bond mix.

Below Portfolio 1 is the HFEA portfolio (55% UPRO/45% TMF, rebalanced quarterly), Portfolio 2 is VTI and Portfolio 3 is 60% VTI/40% VBTLX, rebalanced quarterly).

My view is that it is inconclusive because there isn't enough data but it seems possible that you can "beat the market" with the HFEA portfolio if you can stomach the volatility. I'm thinking that for "found" money for the grandkids where if it fails they'll never know that grandpa screwed up then it is a risk worth taking.

Portfolio Analysis Results (Jan 2010 - Nov 2023)

Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	Market Correlation
HFEA Portfolio	$50,000	$735,429	21.31%	28.92%	73.88%	-64.15%	-69.79%	0.79	1.24	0.72
VTI	$50,000	$258,320	12.52%	15.30%	33.45%	-19.51%	-24.81%	0.79	1.25	1.00
60% VTI/40% VBTLX	$50,000	$158,250	8.63%	9.64%	21.66%	-16.82%	-20.70%	0.81	1.29	0.98

It would be good training for the grandchildren to experience the odd -64.15% drawdown. It would toughen them up!

 

[rmcelwee]

We have a very large investment in TQQQ and maybe 1/10th of that amount in UPRO (still significant). The money has been in there long term. When I FIREd in 2022 the first thing I did was sell $85K of TQQQ out of my brokerage acct. My cost basis was $3 and we sold for $85. In the past two years it has dropped in half (currently around $45). Yes it is volatile but we put a very large amount in our 401K fixed fund so we don't worry about it too much. Our goal is to start DCA out of funds and put them in SPY when the price returns to $85 again.

We always say "If the S&P is down significantly 10 years from now (compared to where it is now) we have more to worry about than money." So we rarely look at it as a HUGH risk. FWIW, we are taking steps as well in the case the market has collapsed 10 years from now.

 

[pb4uski]

As you may recall, we recently had GS#1 who is now 18 months old and GBaby#2 "in the oven" and my DM recent died. Part of my inheritance will include an inherited Roth IRA of ~$50k.

This is money that I would never need. I'm thinking of investing the Roth for dramatic growth for the grandkids benefit and then taking the money out in the tenth year as required.

I'm thinking of Hedgefundie's Excellent Adventure Portfolio (HFEA). See attached link and you can also find it on bogleheads.

HFEA is 55% 3x leveraged S&P 500 bull ETF (UPRO) and 45% 3x leveraged 20-year Treasury bull ETF (TMF) that would be rebalanced quarterly... a risky and volatile combination that backtests very well.

This combination has an average rolling 10-year average return of 26.08% with a low of 11.52% and a high of 35.50%. So with a starting balance of $50k, at the end of 10 years it would total $149k (low) or $507k (average) or $1,043k (high) and would be a great jumpstart for them for their college education and lives.

Alternatively, if I just went 100% UPRO with no rebalancing then based on 10 year total return the account would total $286k (low), $651k (average) and $1,556k (high) at the end of 10 years.

The reason for using a Roth is because with the HFEA the quarterly rebalancing can result in signifcant taxes if done in a taxable account.

The way I figure it is even if the return is average then the grandkids will remember grandpa as a genius.

Thoughts? Am I crazy?

https://www.etfcentral.com/news/hedgefundies-excellent-adventure-3x-leveraged-etf-portfolio

Well, the experiment has begun. The inherited Roth IRA was transferred to me last week and I just bought some UPRO (55%) and TMF (45%).

Not the whole account yet as there are a couple bonds that were called that I won't get the call proceeds until tomorrow and Thursday. I'll probably wait a while before putting that money to work... or maybe not... who knows.

So far, I'm down $6.

 

[Texas Proud]

Well, the experiment has begun. The inherited Roth IRA was transferred to me last week and I just bought some UPRO (55%) and TMF (45%).

Not the whole account yet as there are a couple bonds that were called that I won't get the call proceeds until tomorrow and Thursday. I'll probably wait a while before putting that money to work... or maybe not... who knows.

So far, I'm down $6.

LOL... I just started mine also... a small inherited IRA... but I am going 60/40...


I started a thread about this and will update there...


BUT, I am mad at Vanguard as they would not let me invest in these funds and I had to move the money to Fidelity... that alone cost me over 10% return!!! (Only an estimate as I have not done the math)..

 

[pb4uski]

I thought about 60/40 and just decided to go with the actual HFEA portfolio. Though I learned that there is a modified version that substitutes 5% TQQQ for 5% UPRO.

 

[Closet_Gamer]

Keep us up to date on your experiment!