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

[spider]

Barron, it's pretty easy to upload an excel spreadsheet into Google docs and then publish that, but I'm sure you knew that. Also, there is no easy way to show formulas that I'm aware of.

Quick question, what do you assume about margin rates here? I've never really considered going on margin (in spite of the strong theoretical case) and part of that is b/c margin rates can be kind of high. For example, looking at eTrade margin rates they start at 9.74% (<50k) and fall to 6.74% (>1m). As I'm not a millionaire, these margin rates don't look super enticing to me!

Any specific thoughts on leveraging here? I know margin accounts are not the only way to lever, and if your personal margin rate is 9.74% it almost certainly can't be the best way. [img]/images/graemlins/grin.gif[/img]

[SlowHabit]

The damn stock market is as safe as whatever the economy it's representing. So if you think the stock market is unsafe, that means you think the economy is unsafe. And if that is the case, who the hell cares how much money you have in your bank, your mattress, or your backyard? The economy collapsed. You need to have barrels of moneys to buy a carton of milk.

[pig4bill]

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At least with a bond, I can't lose any of the principal unless they default.

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Right, all you have to do is hold a 30 yr bond for 30 yrs and you are guaranteed not to lose principal.

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Or a 2 year or a 5 year or whatever. The whole point of fixed income, since the return absolutely sucks, is return OF principal, not return ON principal. Absolutely, unequivocably, no risk, short of armageddon. If I'm taking on risk, I want a lot better return.

I'm not saying that is necessarily correct, but I'll bet a lot of people have similar attitudes about fixed income.

[DcifrThs]

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Barron, it's pretty easy to upload an excel spreadsheet into Google docs and then publish that, but I'm sure you knew that. Also, there is no easy way to show formulas that I'm aware of.

Quick question, what do you assume about margin rates here? I've never really considered going on margin (in spite of the strong theoretical case) and part of that is b/c margin rates can be kind of high. For example, looking at eTrade margin rates they start at 9.74% (<50k) and fall to 6.74% (>1m). As I'm not a millionaire, these margin rates don't look super enticing to me!

Any specific thoughts on leveraging here? I know margin accounts are not the only way to lever, and if your personal margin rate is 9.74% it almost certainly can't be the best way. [img]/images/graemlins/grin.gif[/img]

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no assumption on margin b/c no actual margin is used:

Dynamic S&P 500 fund

instead you pay minimal (relatively speaking) expense ratios.

also, i didn't know about the google docs, but can you see my formulas that way? if not then that isn't a huge deal b/c the important assumptions are the correlation/sharpe ratios etc.

i'll try to do that now (never used google docs)

Barron

EDIT:here is the link to my published spreadsheet. i still think it would be useful to see my pretty spreadsheet w/ the formulas so if somebody could tell me how to host it or whatever that'd be nice:

Portfolio Analysis Normal vs. Leveraged

further, this is UUUUUGGGGGLLLLLy relative to mine on my desktop. the places you should concentrate your energy are the "Risk", "Expected Sharpe Ratio" rows as well as the correlation cells. i took a most of the corerlations (that i manually keyed in) from historical analyses and from logical application of expected future correlations.

hope this helps.

[spider]

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The whole point of fixed income, since the return absolutely sucks, is return OF principal, not return ON principal.

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No, the main point of having bonds in your portfolio is the low or negative correlation w/ stocks (aka diversification).

[spider]

Re Dynamic S&P Fund: 4.75 front load & 1.68 expense ratio? Is there not a better way? (Just asking, maybe there isn't and I know nothing about his stuff.)

Also, with Google Docs you can share the whole spreadsheet (including the formulas) but only to email addresses you specify. As far as I can tell when you publish or share publicly, it will only give the values.

[SlowHabit]

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The whole point of fixed income, since the return absolutely sucks, is return OF principal, not return ON principal.

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No, the main point of having bonds in your portfolio is the low or negative correlation w/ stocks (aka diversification).

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No, the main point of having bonds in your portfolio is so you have less stocks.

[DcifrThs]

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The whole point of fixed income, since the return absolutely sucks, is return OF principal, not return ON principal.

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No, the main point of having bonds in your portfolio is the low or negative correlation w/ stocks (aka diversification).

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only TIPS have negative correlation to stocks.

most govt bonds have about 40% positive correlation.

Barron

[DcifrThs]

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Re Dynamic S&P Fund: 4.75 front load & 1.68 expense ratio? Is there not a better way? (Just asking, maybe there isn't and I know nothing about his stuff.)

Also, with Google Docs you can share the whole spreadsheet (including the formulas) but only to email addresses you specify. As far as I can tell when you publish or share publicly, it will only give the values.

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not as far as i know there isn't a better way.

load is paid 1 time. expense ratio annually. if you build a portfolio like this i'd expect to pay something small up front. if you add more to it over time, do you pay the load again? (not surea bout this) if not then it is a great deal. even if you do i'm sure it isn't a huge deal.

also, go through my correlation spreadsheet and let me know if you have a question/issue/correction on any of the #s. they are, like i said, mostly based on various historical studies & my own work in addition to my own logic.

this portfolio should be far better than any single portfolio posted on this forum by a very good margin.

it is easy to initiate and manage so anybody can do it (i.e. you don't need to leverage TIPS w/ repos etc. or pay taxes on them like that so that is great)

Barron