A Leveraged Portfolio investment strategy with higher returns during bull markets and lower draw downs during bear markets than VTSAX.
Why is this strategy different than the rest of the FIRE community?
The norm for Financial Independence Retire Early community is to follow JL Collin’s advice to invest in VTSAX to accumulate wealth. This strategy is great to follow with minimal effort and over 100 years of data.
VTSAX or any total stock market fund is a great path to follow where I could retire at age 55 easily without changing a thing. I could retire comfortably at Age 55 collecting my pension at 24k per year & withdraw my 401k which would accumulate to approximately 2.2 million assuming an 8% Rate of Return.
I do not want to retire that old, I want to retire in my 40’s and spend more time with wife and with my kids before they are all out of the house. For that very reason, I’ve spent 6 months last year back-testing investment strategies that would make the gains during bull markets better and the draw downs during bear market less in comparison to VTSAX.
If you can increase your gains and decrease draw downs, then statistically you would need a lower FI number based on a higher withdrawal rate that could be sustained and reach that FI number faster. I am estimating I can decrease my retirement date by 8 to 10 years utilizing this strategy. What would you do to shave 8-10 years off of your working life?!?! You can’t put a price on time!
So lets get into the real reason why you are reading…
How did I discover a way to beat the Benchmark VTSAX with a leveraged portfolio?
TOTAL STOCK MARKET FUND (BENCHMARK)
- VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares
- VTSMX – Vanguard Total Stock Market Index Fund Investor Shares
- Seeks to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks.
LEVERAGED PORTFOLIO FUNDS
- UOPIX – UltraNasdaq-100 ProFund
- Seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Nasdaq-100® Index.
- RYGBX – Government Long Bond 1.2x Strategy
- Seeks to provide investment results that correspond, before fees and expenses, to 120% of the daily price movement of the current Long Treasury Bond.
- FSMEX – Fidelity® Select Medical Technology and Devices Portfolio
- Seeks to outperform its benchmark through active management.
SO WHY THESE 3 FUNDS?
I started looking at what a very successful fund on it’s own would be and that led me to a Nasdaq composite fund that my previous article, “How to Retire Early, Faster?” elaborated further on. Now if I could double my gains on a highly profitable fund using a leveraged fund and not having to buy leverage myself, that’s also a win.
If you google leverage funds they talk about drawdown risk and decay over time. In my analysis this is true on most leveraged funds, however the two funds that I found that did not experience this decay over the last 20+ years were S&P 500 and Nasdaq leveraged funds since they are based on indexes proven to just go up over time.
Why a long term treasury fund?
My thoughts were that when you retire many financial advisers recommend a split between stocks and bonds, so why not try to minimize the risk on a leveraged portfolio. So i started looking at the best bond funds that act inversely proportional to the NASDAQ composite fund (Nasdaq goes down and bond fund goes up). That way it minimizes the drawdown risks normally associated with leveraged funds. This is where I found a long term treasury fund to act the best over the years through backtesting with minimizing the drawdowns from the 2X Nasdaq fund.
Why did I choose a medical device fund to add to the mix?
Why wouldn’t following the stock & bond mix and try to find a proper mix percentage be the best strategy? I tried that at first by religiously backtesting strategies. I found that if I add FSMEX into the mix helped decrease the total volatility of the portfolio, decreased drawdowns, but it also decreased the upside of the portfolio. This fund in essence helped me meet my portfolio goals of beating VTSAX/VTSMX by multiple percentage points on the upside and minimize the max drawdowns throughout the backtesting timeframe.
Is there an ETF strategy that mimics your mutual fund strategy above?
What if you do not have access to these funds? Well you are in luck as there are ETF’s that greatly match the performance of these 3 funds that could be used to mimic the returns of the strategy as they are all based on the same underlying indexes.
List of other ETF’s & Mutual Funds that have similar performance to those in the above Leverage Portfolio
- UOPIX – UltraNasdaq-100 ProFund
- DXQLX – Direxion Monthly NASDAQ-100 Bull 2x Fund
- QLD – 2x Nasdaq-100 Index ETF
- TQQQ – 3x Nasdaq-100 Index ETF
- RYGBX – Government Long Bond 1.2x Strategy
- SPTL – SPDR® Portfolio Long Term Treasury ETF
- FNBGX – Fidelity® Long-Term Treasury Bond Index Fund
- VGLT – Vanguard Long-Term Treasury ETF
- UBT – PROSHARES 2X ULTRA 20+ YEAR TREASURY
- VUSTX – Vanguard Long-Term Treasury Fund Investor Shares
- TMF – Direxion Daily 20+ Year Treasury Bull 3X Shares ETF
- FSMEX – Fidelity® Select Medical Technology and Devices Portfolio
- IHI – iShares U.S. Medical Devices ETF
- XHE – SPDR® S&P® Health Care Equipment ETF
- CURE – Direxion Daily Healthcare Bull 3X Shares ETF
What’s Next?
In the next post in the Leverage FIRE series you will see how this Leveraged portfolio performed during the great recession of 2008 and in a later post on how it performed during the tech bubble of 2001.
