Radical thought

[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

 

[Markola]

I’d definitely swing for the fences and there are many paths to Rome. That HFEA was interesting to read about. Personally, I’d gravitate toward tech, such as

1. 20% in each of 5 digital monopolies, rebalanced annually:
Alphabet
Apple
Microsoft
Meta
Amazon

2: 100% MicroStrategy (MSTR)

Backtest those for some eye watering returns that seem likely to continue.

No comment on whether you are crazy.

 

[joesxm3]

Small amount of found money from your perspective. Why not put it all on red?

Maybe include a plan to pay back the grandchildren the $50,000 plus 4% interest from your other funds if things go sour.

I had a similar situation back in the tech bubble. I inherited $5000 from my aunt. I took the money and opened a Firsthand Funds account for each of her two granddaughters. They had a ride and lost most of the money eventually. But one later told me that it was a great learning experience.

 

[Closet_Gamer]

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

I don't think its crazy. You have a situation where you can withstand a lot of volatility and have a long horizon. Its also money you can afford to lose. Its walled off from the rest of the portfolio.

I can't comment on the specific investments or structure, but the thought of being aggressive isn't crazy IMO.

 

[Midpack]

I don't think its crazy. You have a situation where you can withstand a lot of volatility and have a long horizon. Its also money you can afford to lose. Its walled off from the rest of the portfolio.

I can't comment on the specific investments or structure, but the thought of being aggressive isn't crazy IMO.

+10. Would have been my answer...

 

[OldShooter]

From a quick search, this is a strategy that you have to manage yourself, not a fund you buy. Right? Looks like a lot of work.

I would beware backtests on this one because of the recent years of very low interest rates juicing its yields.

What about the risk of margin calls?

Agree that investing long term for the kids calls for more aggressive portfolios. That's what I don't like about the idea that we go more toward fixed income as we age. It depends on the size of the portfolio and the purpose of the equity tranche.

 

[pb4uski]

Yes, it is a strategy that I would have to manage but quarterly rebalancing is the only maintenance item. I would simiply add a quarterly reminder to my calendar and then it would take less than 5 minutes each quarter since there are only two ETFs to rebalance... buy the one that is underweight and sell the one that is overweight... that's all. So NOT a lot of work.

I hear you on the backtests but there are enough 5 year periods in the rolling return data that I'm comfortable. Anyway, if the whole thing is going south or sideways I can always bail.

No risk of margin calls... I'm not sure you understand the products if you think there is risk of margin calls.

 

[aja8888]

What about the risk of margin calls?

 

[COcheesehead]

Margin calls?

 

[OldShooter]

... No risk of margin calls... I'm not sure you understand the products if you think there is risk of margin calls.

Sorry. I read more carefully after I posted.

But the ETFs borrow against their assets, so their lenders might be an issue at some point, right? I am too lazy to chase down and read the prospecti.

 

[pb4uski]

I’d definitely swing for the fences and there are many paths to Rome. That HFEA was interesting to read about. Personally, I’d gravitate toward tech, such as

1. 20% in each of 5 digital monopolies, rebalanced annually:
Alphabet
Apple
Microsoft
Meta
Amazon

2: 100% MicroStrategy (MSTR)

Backtest those for some eye watering returns that seem likely to continue.

No comment on whether you are crazy.

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.

 

[ERD50]

No, I don't think it's crazy at all. I sometimes have thought about things like this. But...

Then I put it all in perspective, and if I'm going to swing for the fences with a small % of my portfolio, there's really no material difference between that, and just bumping up my overall AA a bit.

So it sounds exciting, but big picture-wise (looking at all our assets as a whole, which we should always do, money is fungible, etc), I don't think it amounts to anything more than just a mundane AA decision using the usual broad index funds/ETFs.

Sorry to be so boring, but am I off-base?

-ERD50

 

[GaryInCO]

Here's a 37-year backtest of the strategy. I generated synthetic UPRO and TMF (based on VFINX and VUSTX) to get the long history. Blue is the account value (notice the left axis is log-scaled), red is the drawdown (right axis). In this backtest, over the entire 37-year period it's returned 19.1% with a daily Sharpe of 0.82.

BTW this just rebalances annually. My tests say quarterly balancing is basically identical to yearly, so why bother rebalancing more often?

As all the financial papers have said, 2022 was the worst year in the last century for the classic 60/40 strategy. Since this is a levered-up version of that strategy, it also had a rough year, the worst since (at least) 1985.

The big question is, do you believe 60/40 will do well going forward? Or has the world changed, and it won't work anymore? A lot of ink has been spilled arguing both ways. If you think 60/40 will continue to work, then this should do well too. Just be ready for a rough ride at times. Like the 50-65% drawdowns in the last year or so. But it makes up for that with runs like 2010-2021, which returned over 27% per year. The account grew over 18x in 12 years.

Something to consider is that a stock/bond strategy like this relies on negative correlation. When stocks go down, bonds tend to go up. Or they're supposed to. For the last few years the correlation has gone positive. Which is why it got whacked so hard in 2022 -- both UPRO and TMF went down. But then again, stocks/bonds were positively correlated from the mid-80's through about 1998, and it did fine then, soo...

 

[VFK57]

I do not want to discourage you but high return is in most cases is a high risk of losing an investment. About 3 years back, I invested in one of the well to do, large oil company Lukoil, no warning of de listing from E-Trade, it was de-listed and the investment was frozen after Russia attacked Ukraine and I stuck with it. Two years ago, I invested in a California Farm land: Pistachio and Almonds Farm, excellent returns and land price annual growth, promises of no problems, it caused last year huge loss. Just be careful.

 

[pb4uski]

... Something to consider is that a stock/bond strategy like this relies on negative correlation. When stocks go down, bonds tend to go up. Or they're supposed to. For the last few years the correlation has gone positive. Which is why it got whacked so hard in 2022 -- both UPRO and TMF went down. But then again, stocks/bonds were positively correlated from the mid-80's through about 1998, and it did fine then, soo...

I agree, negative correlation is an important aspect of the strategy. And while we have seen brief periods of time in the last decade or so where bonds didn't zig when stocks zagged, the big question for me is whether those instances are just anomalys or indicative of some new normal.

I guess that I can protect against that risk by close monitoring the account or perhaps ratcheting stop loss orders on each ETF.

 

[Exchme]

No, I don't think it's crazy at all. I sometimes have thought about things like this. But...

Then I put it all in perspective, and if I'm going to swing for the fences with a small % of my portfolio, there's really no material difference between that, and just bumping up my overall AA a bit.

So it sounds exciting, but big picture-wise (looking at all our assets as a whole, which we should always do, money is fungible, etc), I don't think it amounts to anything more than just a mundane AA decision using the usual broad index funds/ETFs.

Sorry to be so boring, but am I off-base?

-ERD50

I was in the midst of writing the same thing when I saw your post. IIRC Pb4uski has hardly any stocks. I would have just increased stock holdings some, starting to think more long term about leaving a legacy. That would get the same overall result without the high flying trapeze act of HEFA that can also result in a big splat.

 

[marinauser]

My only issue would be that you don't really have a 10 year horizon except for the first year. Are you willing to adjust your tactics as your horizon declines. For instance what you want to do today may be substantially different in 6 years when your horizon is only 4 years. If not, are you willing to take a 50% smack in year 9 for instance.

 

[Ncc1701]

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.

 

[4legsgood]

Is it better to swing for the fences in tax-free or taxable?

 

[FREE866]

I'm so proud to see that you're considering a balls to the wall equity holding


I considered doing UPRO for my nieces Inherited Roth , but decided on just going with VTI

 

[38Chevy454]

I think it's a fine strategy for some not required money. Keep in the Roth to avoid taxes as you said, at least until you have to take it out. Then convert to 529 account and keep the "tax free" growth going, although probably wise to become a bit less leveraged at that time of 529. Your grandkids (and their parents!!) will benefit tremendously from great grandmother's money.

 

[pb4uski]

I wouldn't have those 3x leveraged ETF investment options in any 529 plan.

 

[pb4uski]

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.

I fully realize that UPRO is not meant to be a long term holding, but many investors use it that way nonetheless and the data supports that the 3x gets diluted somewhat if it is held for a long time, but the returns are still enhanced, just not 3x. It dilutes it to more like 2x as I recall.

 

[pb4uski]

Is it better to swing for the fences in tax-free or taxable?

Tax-free is preferable because the quarterly rebalancing is likely to generate significant short term capital gains or losses.

 

[pb4uski]

I was in the midst of writing the same thing when I saw your post. IIRC Pb4uski has hardly any stocks. I would have just increased stock holdings some, starting to think more long term about leaving a legacy. That would get the same overall result without the high flying trapeze act of HEFA that can also result in a big splat.

No common stocks right now but I do have some high quality preferred stocks. I am open to common stocks in the future if/when common stock valuations become more sensible.

I would compartmentalize this from all my other holdings from an investment management perspective and not count it in the AA of my retirement portfolio.