Pagination Chico Marx.

“Who are you going to believe, me or your own eyes?”, The comedian famous asked in “Duck Soup”. And we, the investors, face a similar challenge from the experts and regulators who are there to take care of us.

Today’s topic is the famous crazy “3X” retirement portfolio which we are repeatedly told we must not buy because sooner or later it will wipe us out.

It has been over a decade since the Securities and Exchange Commission warned Mom and Pop investors should not put their investment funds in leveraged mutual funds that are designed to give them two or three times the daily returns of stocks and bonds, up or down. decrease.

It’s been over a year since I reported that investors who ignored this wise advice have since made more money than Croesus and have been laughing all the way to the bank.

Breaking news: They still kiss like bandits, even though they’re not supposed to.

Look, I’m not making recommendations, I’m just telling you what’s going on.

The basic portfolio in question is 50% in ProShares UltraPro S&P 500 UPRO,
-2.63%,
which is designed to give you three times the performance of the S&P 500 stock index and 50% in DirexionDaily 20+ Year Treasury Bull 3X TMF,
+ 3.56%,
which is designed to give you three times the performance of long-term US Treasury bonds.

Since the start of the year, this quarterly rebalanced portfolio is up 29%, although this should not be the case. Bond and equity markets have been volatile, with bonds falling particularly hard and then rallying, which is believed to be poison for these funds.

In contrast, the much more sensible portfolio that ignored these volatile funds, and instead split its money evenly between a simple US stock fund and a simple long-term Treasury bond fund, only increased by 9%.

Whoops.

This is nothing new.

Over the past decade, this 3x portfolio, rebalanced quarterly, would have turned an initial investment of $ 1,000 into $ 15,100.

The simple equivalent, 1x: $ 2,760, or less than a fifth as much.

So much for the wisdom of the experts!

This adds to my growing suspicion that one can get better financial advice from watching old Marx Brothers films than from, say, reading economics textbooks. (Oh, and trust the Communists to get their economic analysis from the bad “Marx.”)

Theoretically, these leveraged funds are a looming disaster for long-term investors. These funds are designed only to offer you 3 times the performance of the underlying assets (stocks and bonds) per day. They do this by trading in derivatives. Once you hold them for more than a day, you start playing the financial equivalent of Russian Roulette. If, for example, the stock market goes up one day and collapses the next, you could in theory find yourself in a much worse situation than at the beginning. You are affected by the costs of trading. And you can suffer from the famous paradox of percentages: it takes a 100% gain just to recover from a 50% loss.

The UPRO ultra bond fund fell 40% in the first three months of this year during the bond market meltdown, and it’s still down around 15%.

I’m not offering a view here, although I wouldn’t take that risk with my own money. But I was led to take another look at this portfolio after the stock market crashed sharply on Friday.

When the stock market crashes, the only asset that tends to do well are US Treasury bonds, and the longer the better. This is arguably the number one reason investors hold Treasury bonds, regardless of their opinion of the economy or the stock market. T-bills offer a form of “insurance” in case the stock market crashes and things go to hell in a handcart.

On Friday, PIMCO’s 25+ year zero coupon ZROZ ETF,
+1.78%
and Vanguard’s EDV Extended Life Treasury ETF,
+1.58%
rose 3% or more, providing a useful cushion for portfolios while their stocks fell. But the TMF offered more than double the cushion, increasing more than double or 7%.

(If you really wanted to be smart, the “call options” on the TMF, which give you a grip on the fund’s stocks in case they rise significantly, have jumped up to 50%.)

No, of course, we shouldn’t be taking a long-term position in that 3x Treasury bond fund as a way to insure the rest of our portfolios. It may have worked in practice, and it may continue to work in practice as far as I know, but it doesn’t work in theory.

Or, as Chico would say, who are you going to believe: the experts or the market?


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