March 24, 2020
A Leveraged Portfolio investment strategy that outperformed the market downturn of the great recession. Can your Portfolio Beat the Great Recession?
Is it possible to consistently beat the market during a major downturn?
Like most of you I suffered greatly during the great recession of 2007-2009. I was laid off from the engineering firm I worked at for 3 years. It is true that being laid off has the emotional effects equal to a death in the family. I took it very hard on leaving a job I loved designing casinos, hotels, restaurants, bars, and convention centers. At the time, I became one of thousands of other unemployed engineers drawing unemployment benefits to barely get by.
You never truly know what you can endure until you go from having everything to nothing in a blink of an eye. This experience made me extremely humble and never feeling safe in any job since that ordeal.
What shouldn’t you do during a bear market or recession?
Sometimes one has to swallow their pride and move home with their parents or family when time gets tough, but I chose a foolish plan instead. I chose to do the one thing that every Financial Planner & FIRE follower preaches never to do. That was, using the hardship withdrawal clause and withdrawing all the funds from my 401k in the beginning of 2009. It was only a measly $10,000 after all the market downturns. This money did go for food, rent, and car payments until I was finally able to find another full time job 9 months later. Now for the real kick in the nuts, that same $10,000 would be worth around $40k if only invested in VTSAX or S&P 500 now based on my extremely poor market withdrawal timing.
It is quite miserable to build up a nest egg and then be forced to deplete it to zero. One can also surmise that when you start building up another nest egg you will want to figure out any way to not have to experience that same agony ever again.
Alas, I have spent several years and several iterations of how to beat market during the best of times and the worst of times as I discussed in Leveraged Fire – Part 1. So the answer is YES, you can beat the market!
So lets get into the good stuff on how the Leverage portfolio performed during the Great Recession…
How did the Leveraged Portfolio perform during the Great Recession?
BACK-TESTING PARAMETERS
Start Date
The back-testing strategy is set to start on March 2007 with the last monthly high before the great recession started.
End Date
The back-testing strategy is set to end on December 31, 2019 with the last monthly high before the great recession started.
Initial Balance
$100,000 (This balance is assumed right at the peak before the Great Recession to capture the worst drawdowns during this time period)
Monthly Contribution
Monthly contribution of $1,583 ($18,996 Annually to max out the 401k current Limit)
Rebalancing
Annual rebalance was chosen as it showed through multiple back-testing to be the best long term returns by only doing it on an annual basis.
Benchmark
As stated throughout this post and Leveraged Fire – Part 1 this strategy was based on beating the Vanguard’s Total Stock Market Fund (VTSAX)
Fee Structure
The annual fee for using these leveraged funds equals 1.1%. A portfolio strategy would not be an accurate comparison if it did not take into account this fee structure.
LEVERAGED PORTFOLIOS TESTED
PORTFOLIO PERFORMANCE
PORTFOLIO GROWTH
PORTFOLIO ANNUAL RETURNS
PORTFOLIO DRAWDOWNS
SO WHICH PORTFOLIO WAS CHOSEN AS THE LEVERAGED PORTFOLIO?
If you compare the worst drawdowns of Portfolios 1, 2, 3, & VTSAX (-30.37%, -23.47%, -37.74%, & -50.89%). They all checked the box on beating VTSAX on Max Drawdown (excluding cashflows). Portfolio 2 had the lowest max drawdown at -23.47% and won this category.
If you compare the Worst Year of Portfolios 1, 2, 3, & VTSAX (-14.7%, -8.19%, -23.51%, & -37.04%). They all checked the box on beating VTSAX on Worst Year. Portfolio 2 had the best worst year at -8.19% and won this category.
If you compare the Best Year of Portfolios 1, 2, 3, & VTSAX (42.26%, 37.77%, 48.74%, & 33.35%). They all checked the box on beating VTSAX on Best Year. Portfolio 3 had the best worst year at 48.74% and won this category.
If you compare the Standard Deviations (Stdev) of Portfolios 1, 2, 3, & VTSAX (15.09%, 13.44%, 16.96%, & 15.12%). Portfolios 1 & 2 beat VTSAX on having a better standard deviation. Portfolio 2 had the lowest standard deviation at 13.44% and won this category.
If you compare the CAGR (Compound Annual Gross Return) – (Inflation adjusted) of Portfolios 1, 2, 3, & VTSAX (22.46%, 21.35%, 23.32%, & 16.82%). They all checked the box on beating VTSAX. Portfolio 3 had the best CAGR (inflation adjusted) at 23.32% and won this category.
Portfolio 2 won 1st prize to become the Leveraged Portfolio!
Why was Portfolio 2 chosen?
All 3 Portfolios beat VTSAX with Lower Max Drawdowns, Better Worst Years, Better Best Years, and better CAGR’s. This result matched the original portfolio criteria.
Now if you look at portfolio 3, it won best year & CAGR. However, if you follow the Portfolio Growth chart you can see that it took until mid 2013 for Portfolio 3 to finally get above and stay above Portfolio 2, 6.5 years later. Now if we go into another 10 year bull run that is great. Now to play devil’s advocate. What would happen if we had two bear markets/recessions within 5 years of each other or in back to back years? Now that 6.5 years to outpace portfolio 2 increases to 8 or 10 years or longer until it finally catches and passes it up.
How can you factor your emotions into your portfolio strategy?
Building wealth over the long term and beating VTSAX in good/bad years is an awesome feat in and by itself. However, when you add emotions, standard deviation comes into play to see if one is going to stay the course.
When you look at standard deviation, only Portfolios Re1 & 2 beat VTSAX’s standard deviation. This helps to flatten out the portfolio curves to exhibit more of a ripple/dip vs drop effect when the next major pandemic, financial crisis, war, etc happens and people are yelling that the sky is falling.
Portfolio 2 does not have the best upside potential should another 10 year bull market occur. However, if 2 bear markets happen within a few years of each other or in back to back years Portfolio 2 will provide better overall capital preservation of the portfolios presented.
How is this Leveraged Portfolio performing in Real Time?
This leveraged portfolio plan matches my 401k allocation & strategy. Please follow along with how the leveraged portfolio #2 is performing vs S&P 500 & VTSAX in my monthly Leveraged Portfolio updates starting with: January 2020
