How safe is the stock market?

[DcifrThs]

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ETF's are like a bond fund, the interest is reflected in the total tield?

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Let's take IEF, the iShares 7-10 yr Treasuries. A simplified version of what it does is to buy a 10 yr Treasury, hold it for a 3 yrs and sell. (Of course, in reality there is going to be a mix of maturities, holding times, etc.) Any interest and gains are then passed to the shareholders as dividends. Obv, you don't have much control over things compared to buying and selling bonds, but you also have minimal transactions costs, which is definitely not true if you actually were going to buy & sell bonds.


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I'm not saying nobody should have bonds either, but you were asking why there seems to be little interest in them. I gave you one reason - too much additional risk for too little additional value.

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[img]/images/graemlins/confused.gif[/img] The purpose of adding bonds to an equity allocation is to sacrifice some expected returns for a reduction in volatility (both of these from the perspective of your entire portfolio).

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Broken record time again...but this time i have actual suggestions for funds.

you start here lets say:

Portfolio Allocation without Leveraged Funds

Fund Sector - Portfolio %
S&P 500 Index Fund - 20%
NASDAQ 100 Fund - 20%
Intl Equity Fund - 20%
U.S. Treasury Fund - 10%
U.S. Corporate Bond Fund - 10%
U.S. High Yield Bond Fund - 10%
U.S. TIPs Fund - 10%
TOTAL - 100%

and you then use leverage to free up capital:

Portfolio Allocation with Leveraged Funds

Fund Sector/Name - Leverage “X” times- Allocation %
Dynamic S&P 500 - 2X - 10%
Dynamic OTC - 2X - 10%
Ultra Intl - 2X - 10%
Govt. L-Bond Adv - 1.2X - 8%
U.S. Corporate Bond - 10%
U.S. High Yield Bond - 10%
U.S. TIPs Fund - 10%
TOTAL - 68%

and finally you allocate the extra capital to new more efficient places:

Fund Sector/Name - Leverage “X” times- Allocation %
Dynamic S&P 500 - 2X - 10%
Dynamic OTC - 2X - 10%
Ultra Intl - 2X - 10%
Govt. L-Bond Adv - 1.2X - 8%
Collateralized Commodity Fund - 12%
Emerging Market Debt Fund - 20%
U.S. TIPs Fund - 30%
TOTAL - 100%

I have calculated the portfolio expected SR using the top and bottom allocation and reasonable assumptions (that "reasonable" people may disagree with , but changing them here and there doesn't change the overall results much).

if there is a way to host an excel sheet on the internet i would be glad to post it so you can see my changes and what correlation/vol/return assumptions i made. i also didn't take FX risk into account.

the results were as follows:

NON LEVERAGED FUND:
Portfolio Expected XR: 3.40%
Portfolio Expected Risk 10.07%
Portfolio Expected SR: 0.34

LEVERAGED FUND:
Portfolio Expected XR: 5.00%
Portfolio Expected Risk 10.69%
Portfolio Expected SR: 0.47

i think those results speak for themselves.

by using leverage to increase the risk share of more lowly/negatively correlated asset classes while maintaining the same effective capital exposure to your equity funds, you greatly increase your portfolio efficiency.

feel free to ask questions or if you know how to host a spreadsheet on the internet, lemme know.

i'll also post the Capital and risk pies if you guys want...they are a great visual aid.

Barron