Invest 15 Minutes to Earn Around 13% Per Year
My last article was about how some ETF investment strategies made good money even during the wild and difficult years of 2008 and 2020. They applied either momentum-based or Risk Parity methods to help you decide in which assets you should invest in.
This involves spending some time at the beginning of each month to evaluate how your assets are performing and then re-allocating them according to each strategies’ rules.
But what if this means too much buying and selling for you, and requires too much of your time?
There are some good reasons to use investment strategies that have a hands-off character.
- You may have a tax situation that discourages buying and selling equities often.
- If you think frequent transactions are generally not so prudent, you are right! People who constantly have an eye on financial TV, and buy and sell on a whim are quite often the worst investors. Also: Worrying about the stock market all the time is bad for your health.
- Buy-and-hold/hope (staying 100% invested, all the time) would be so wonderful if it worked. In reality, there are some times where it is better to bail out. During 2008 for instance, or if you were investing in Japan in 1989. Or if you had Nasdaq stocks in 2000. Buy-and-hope is fine if you don’t mind an occasional drawdown of 50%, or even 90% — but why would you be OK with that?
On the other hand, Buy-and-hope’s basic tenet of Doing Nothing is almost correct: in the long run, most stocks go up. So, how about Doing Almost Nothing, aka “Almost Buy-and-Hold?”
The basic rules
All of these strategies call for an annual rebalancing of a quite simple portfolio. In other words: exactly one year after you begin, you calculate what each of your investments is worth, and then tailor your holdings to re-create the original allocations. It takes about fifteen minutes. Wash, rinse, and repeat every year.
1) The basic strategy: a very simple kind of barbell strategy, consisting of 66% mid-term treasuries, and 34% S&P 500.
Surely, you’ve heard of 60/40? That implies 60% stocks and 40% treasuries, as a balanced, reasonable strategy. So we take that, and we turn it around to 40/60 to make it more conservative. And then we shift it by a few percentages (less risk) and to make it even more reasonable, we use mid-term treasuries which are less volatile and less sensitive to interest rates than the standard longer-term treasuries are.
In other words, 66% IEF and 34% SPY (each are ETFs that can be bought and sold quite cheaply).
Results from 2003: CAGR 7.08%; maximum monthly drawdown -10.54%; worst year -0.9%. Year to date (to May 1): +4.0%.
As you can see, this strategy has weathered the crises of 2008, 2011, and 2020 with no great difficulty at all.
You can replicate this strategy here.
Not long-term enough? Then substitute IEF/SPY for the equivalent funds VFITX and VFINX. Then, results go back to 1992, with only slightly worse results. Or use FGOVX, which is the Fidelity Government Income fund, and go back to 1985, with again similar performance.
2) Now add some spicy sauce
7% return is OK, but you want more, and are willing to put up with higher risk and volatility? Then use leverage.
There is nothing inherently evil about leverage. Anybody who buys a house with a mortgage uses it. Famously, Warren Buffet has said that leverage was a giant-killer — but he meant unbalanced leverage: that’s when you are leveraged in stocks only, or in bonds, without a counter-weight. Then, bad times will quickly decimate your wealth. Don’t put your money on one deck of cards!
Applying double leverage doesn’t quite double the return, unfortunately. But it also doesn’t double the drawdown, very fortunately! Use the ETFs UST and SSO, and earn from 2010 onwards a CAGR 13.08% and a maximum monthly drawdown of -7.68%. The worst year is -5.69%. Year to date (to May 1, 2020): +5.39%.
Link to this strategy: here.
Still not spicy enough? Then use triple leverage. But don’t bet the house on this one! ETFs: TYD/SPXL. CAGR 20.34%; maximum monthly drawdown -10.96%. The worst year is -8.05%. Year to date (to May 1): +6.06%.
3) Or go for Technology
Hat tip to “Varan” for this barbell strategy, where we invest in the Nasdaq technology index with leverage, instead of in the general stock market.
15% TQQQ (3x leveraged Nasdaq), 85% 2x leveraged intermediate treasuries (UST).
CAGR from 2011: 14.76%; maximum monthly drawdown -10.4%. The worst year was -3.89%. Year to date (to May 1): +15.43%. What a way to go through a crisis!
Link to this strategy here.
Keep in mind however that Corona has been technology-friendly: Netflix and Amazon have profited strongly. The next crisis will be different. This kind of strategy has worked well since 2003 and will continue to reflect technological progress, but if we ever get into bubble territory, then beware! The years 2000-2002 would have harmed you considerably.
(That said, an unleveraged 15%/85% Nasdaq/intermediate treasury mix would have been OK from the year 2000 onwards, due to the evening-out that the treasuries cause…)
4) Or stay tuned for my next article,
where I will describe an annual strategy that also invests in gold, to protect you against inflationary bad times.
These strategies worked reasonably well in 2008, as well as during the Corona crisis (until now). When you extrapolate them backward, you find that they also survived the first decade of the century pretty well, as well as the 1990s.
Obviously, the future will not mirror the past. We’ve had several crashes these past decades, but we haven’t experienced depression, or strong inflation, or stagflation. Buyer beware — there is no guarantee what works in one lifetime works in the future.
Personally, I don’t have my own skin in these games: I prefer the better ratio of risk-to-reward that my other, monthly-allocated strategies enjoy. I am also a hands-on guy and have enough spare time to take a close watch on my holdings. And, here in Germany, there is no tax advantage to longer-term holdings. Finally, I am experienced enough to not let the stock market drive me crazy!
What kind of an investor are you? Let me know in the comments, and let me know if you have any questions!